There's nothing easy, or funny, about trying to turn around a business. Everyone who gave it a shot at Yahoo learned how difficult it can be. While fear of failure can be debilitating, you have to learn how to press on and do what is necessary.
When SoftBank released its quarterly earnings on Monday, it revealed that its investment in WeWork had to be written down by $9.2 billion, and that was on a $10.3 billion investment. The slides SoftBank provided to show "hypothetical" details about what turning WeWork around would entail were treated as a joke. No one should be laughing now.
WeWork released its own 49-slide deck for investors, back last month when it was looking at debt financing as a way out of its money issues, detailing its plans to resuscitate itself. And a plan was definitely necessary.
The $47 billion valuation the company received in an early 2019 investment round from SoftBank seemed totally unrealistic and not at all in keeping with what the company's worth might be. The concept of subleasing space to businesses goes back to the 1980s. International Workplace Group (IWG), the largest company in the industry, has more than 3,300 locations. WeWork has 600 with 676,000 desks--a number that IWG doesn't bother to report.
That's probably because it knows it's a real estate company in the business of letting out space and looking at occupancy rates, not necessarily the specific configuration of buildings that might make the business seem bigger. The IWG presentation may not be as impressive, but it does clearly allow for a working and profitable business model.
But what passed for strategy in WeWork's past is clearly developing:
- WeWork plans to focus on enterprise customers that can ensure larger blocks of occupancy for longer periods of time for steadier business.
- The company will focus on "profitable market share expansion."
- WeWork now looks to "proven executives in membership-focused, subscription-based businesses" rather than being "founder-led."
- It will divest itself of seven different non-core businesses.
This is going to be one major shift for everyone. Start with people who work for the company. I'd have to guess that many will go, between dropping entire businesses and unprofitable locations. Whether that means the company will close some locations that don't offer that profitable market share expansion opportunities remains to be seen.
And then there are the customers. WeWork says there are no plans to ignore or abandon existing members in the quest to bring in more enterprise business. And it's not like the company has 100% occupancy rates even in its most established locations, so why throw away business?
That said, I think any prudent business owner would monitor how WeWork continues to treat them and whether there is any noticeable change in services. Perhaps the company is correct and none of that will change. But part of running a business is to do scenario planning and risk management.
By the way, considering other options is always a good step in business management. According to the company's own presentation, the core business model involves renting space for $45 a square foot with an additional $25 a square foot in operating expenses, for a total of $70 a square foot and then charging $100 a square foot in a combination of monthly fees and extra costs for things like printing and IT support. A 30 percent gross margin seems like a significant extra cost. It might make sense for a smaller company that doesn't yet have long-term leasing plans and which would rather spend more as an operating expense than sink larger amounts of capital up front into building out a space for its use.
One other thing to consider for business entrepreneurs is to look at this deck and the process tough which corporate management tried to explain the business and plot a path forward. This is a great exercise as it will clarify your own thoughts.