Topics
Latest
AI
Amazon
Image Credits:KAZUHIRO NOGI(opens in a new window)/ Getty Images
Apps
Biotech & Health
mood
Image Credits:KAZUHIRO NOGI(opens in a new window)/ Getty Images
Cloud Computing
Commerce
Crypto
Image Credits:WeWork
enterprisingness
EVs
Fintech
Image Credits:WeWork
Fundraising
contrivance
gage
Image Credits:WeWork
Government & Policy
computer hardware
Layoffs
Media & Entertainment
Meta
Microsoft
privateness
Robotics
security department
Social
blank space
Startups
TikTok
transport
Venture
More from TechCrunch
event
Startup Battlefield
StrictlyVC
newssheet
Podcasts
picture
Partner Content
TechCrunch Brand Studio
Crunchboard
get hold of Us
WeWork ’s failure filing has go far . The well - known whippy office - blank party has file for Chapter 11 bankruptcy protection in the United States and Canada , seeking to convert certain debt to equity investment , and “ further rationalize its commercial government agency lease portfolio . ”
The Exchange explore startup , market and money .
In fewer words : WeWork wants out of some of its leases while keeping its spark on so it can molt liability and get its business to a gunpoint where it can self - sustain . For more on the refinement of the filing , seeTechCrunch ’s insurance coverage of the newsworthiness .
This morning , permit ’s talk about WeWork ’s economics . Did the company ’s line of work ever make sense ? To answer that enquiry , we ’ll go over its S-1 filings , its SPAC mountain and its other earnings report .
A history of unworkable economics
To part , we have to rewind the clock to 2019 .
There was a metre when WeWork was a raging , venture - back troupe . steer into its IPO filing , the market knew that the companywas quite unprofitable , but as with all private society , WeWork ’s lack of clearly outline results made it seem more appealing . It was not until the companyfiled to go publicthat we really learned how it had financed its impressive ontogenesis rates .
Join us at TechCrunch Sessions: AI
Exhibit at TechCrunch Sessions: AI
And grow WeWork did . It proceed from taxation of $ 436.1 million in 2016 to $ 886 million in 2017 , $ 1.82 billion in 2018 , and $ 1.54 billion in the first one-half of 2019 .
That growing derive at a massive price . The company ’s operating passing swelled from $ 931.8 million in 2017 to $ 1.69 billion in 2018 , and then to $ 1.37 billion in the first half of 2019 . In poor , WeWork grew quickly but had to burn piles of hard cash to do it .
Which beg the question : How was the company misplace so much money on something as well - realise as office space leasing ? WeWork did spend too much clock time and money on effort that had little posture on its centre operations , but what mattered more is the fact that its business was basically drivel when it tried to go public .
allow me explain :
In shortsighted , WeWork ’s core business was manoeuver at a gross gross profit loss after the disparagement and amortisation costs were added to its location operating costs . When you equate that lacklustre profitability picture show with the society ’s astounding costs of $ 2.09 billion in the first one-half of 2019 , you start to see how it make out to misplace all that money .
So , what did WeWork do ? It came up withnewandbettermath to make itself seem more profitable . Here ’s the company describing a much kind metric that it preferred to more traditional physical body :
We define “ contribution security deposit including non - cash generally accepted accounting principles straight - blood line lease cost ” as membership and service receipts less location operating expenses ( both as determined and reported in conformity with GAAP ) , adjusted to shut out non - cash stock - establish compensation expense include in location operating expenses . We delineate “ part allowance boot out non - cash generally accepted accounting principles straight - line rental price ” as contribution margin include non - cash GAAP straight - line lease monetary value further adjusted to exclude non - cash GAAP straight - line term of a contract cost .
If you may parse that , congratulations . It is n’t a simple conception , but in essence WeWork found a room to make it face like its core business — running and rent office space — did generate some margins . Its “ contribution tolerance admit non - cash GAAP straight - dividing line rental price ” came to $ 339.9 million in H1 2019 , from the aforesaid $ 1.35 billion in rank and service tax income . That ’s not awful gross margin for a non - tech product , but give the fiscal jiggering it took to get there , few investor were impressed at the metre .
What ’s worse , the ship’s company was inflame entire bale of Johnny Cash to generate that crack - adjusted margin from its core byplay . In just the first half of 2019 , WeWork burned $ 198.7 million in John Cash to fund its cognitive process , and another $ 2.36 billion to fund its investing work . That was make up by monolithic investment inflows , but the society itself was cash - hungry , increasingly unprofitable and had ambiguous unit economics at best .
Then , as we all hark back , WeWork finally pulled its IPO after a few S-1 / A filing and everyone block about it for a while .
Enter the SPAC .
The 2021 pitch
Cognizant of the failing that everyone noticed when it first tried to go public , WeWork emphasize “ recent price optimization efforts ” that would serve it achieve “ profitable growth in 2021 and beyond ” inits SPAC presentation .
Here ’s how the company described its COVID - era public presentation at the fourth dimension :
That was the past times . How did WeWork see its future bearing out ? It previse rapid revenue emergence and rise align EBITDA :
Another chart point to the fourth fourth part of 2021 as the point where the party would founder even on an adjusted EBITDA basis , and the company said it had a “ clear path ” to that result .
So , what happened ?
Whoops
In its first quarter as a public company , WeWorkpostedQ2 revenues of $ 593 million , an adjust Earnings Before Interest Taxes Depreciation and Amortization loss of $ 449 million , a net exit of $ 923 million , a free hard cash deficit of $ 649 million , and $ 1.6 billion in cash .
Sure , you must be think , that looks absolutely terrible , but the ship’s company forecast just $ 900 million in adjusted Earnings Before Interest Taxes Depreciation and Amortization passing in the year , so certainly things drive good ?
The numbers did improve somewhat inthe third poop : Revenue come in at $ 661 million , adjusted EBITDA loss was $ 356 million , innocent cash deficit of $ 430 million , and $ 1.2 billion in cash .
To hit its aline EBITDA target for the year , however , WeWork would have to do very wellin the 4th fourth . Did that happen ? Nope . full gross of $ 718 million led to an adjusted Earnings Before Interest Taxes Depreciation and Amortization passing of $ 283 million , and a innocent cash deficit of $ 467 million .
In 2021 , WeWork ended the year with receipts of $ 2.57 billion , adjusted EBITDA release of $ 1.53 billion , and net going of $ 4.63 billion . Comparing those soma with what we see in its SPAC deck , there ’s an incredibly monumental divergence .
The next year wasonly slightly better . Revenue of $ 3.25 billion led to an operating loss of $ 1.59 billion , and adjusted EBITDA loss of $ 477 million . So much for interchange to adjust profitability in late 2021 .
Why did the ship not right itself ? Why did the plan fail , even with the capital raise from its SPAC debut on the public markets ?
In 2022 , WeWork had membership and service taxation of $ 3.20 billion . Against that , it had location operating expense of $ 2.91 billion . Even before we consider depreciation and amortization disbursement for those spaces , the company ’s meat product had low - brow gross profit even after years of work to improve its operating radical . All that work got it the kind of margins you expect to attain from selling milk .
So , after all those years , all the million in capital , all the promises , the ballyhoo , a failed IPO cycle , a SPAC offering , and time after an IPO to wrench the business around , WeWork finish up as a crushed - margin company that was torching cash .
The lesson
I have learn several things from WeWork ’s train crash :
Excessive cleverness usually fails
Do you know why WeWork ’s aline EBITDA results were so much better than its operating losses ? part because the ship’s company discounted “ depreciation and amortization ” in the familiarised profitability metric . Why ? Because it ’s a non - cash charge .
sure as shooting , but the figure was still depreciation and amortization off drop immediate payment . The company was stuffing loss into its investing cash flow — as best as I can tell , but please enjoy reading 8 trillion pages of historical SEC filings and investor presentations — only to , voilà , make them disappear in its income statement . fiscal sleight of hand is just that and it is nearly always too cute by far .
Don’t scale a low-margin business too quickly
We ’ve seen this happen a bunch in late years : Sweetgreen , Rent the Runway , the list goes on . Many companies can grow speedily , but many also do n’t have the economics to support that rapid growth if international capital dries up .
The reason why some software businesses can scale like gods is that their core political economy jack gold . sure as shooting , SaaS company burn hard cash as they spread out , but every dollar of recurring taxation they impart in puts three quarters ’ worth of pure net income in their pockets . That can pencil out , even if it is dear . That poser just does n’t function when the gross margins in question are , to be straight-from-the-shoulder , scum .
Stick to tech
VCs and other private - market investors should not convince themselves that a quickly - growing society that is engineering - contiguous is actually a tech company . This is an easy cakehole to hang into . I do not moderate that I would do better were I to be a speculation investor . I would do worse , in all likelihood . But for the pros out there , growth is not adequate , even if you really , really wish that it was .
I keep thinking that we ’ve closed the book on WeWork , but it proceed coming back . Perhaps it will become a lean , business office rental company once the bankruptcy procedure scat through . That model can make a buck , just not $ 47 billion of them .
