Deep-pocketed venture capitalists such as SoftBank -- a lead investor in Uber and WeWork -- have invested enormous sums of money on the idea that it's fine for a company to lose big bucks as long as it grows more than 100 percent. This principle worked well for SoftBank's investment in Uber -- but with Uber's stock down 31 percent since, it has hurt its IPO-day investors.
It's no accident that SoftBank is now holding shares in a company -- office space renter WeWork -- that enjoyed a peak value of $47 billion and then pulled its IPO off the market because investors balked at a far lower valuation, in the $10 billion to $15 billion range.
Before pulling its IPO off the market, WeWork's 2018 results featured 100 percent revenue growth to $1.82 billion and a $1.62 billion loss. Since then, co-founder Adam Neumann, now non-executive chairman, has lost his CEO slot and suffered a diminution in his voting control of the company.
What's more, the co-CEOs who took over are frantically cutting costs as the company burns through its remaining cash -- which totaled $2.5 billion at the end of June 2019 -- at a quarterly rate of $700 million, The Wall Street Journal reported on September 30.
The cost savings could include "thousands of job cuts, putting extraneous businesses up for sale and purging some luxuries from the previous CEO, such as a G650ER jet purchased for more than $60 million last year," noted the Journal.
The still-unfolding WeWork story offers four lessons for founders.
1. Know Which Stage of Scaling You're In
If you're like most founders, you have big ambitions. To achieve them, you have to turn your idea into a much larger company -- possibly a publicly traded company worth billions.
To do that, you need to scale through four stages. As I wrote in Scaling Your Startup, those include:
- Winning the first customers -- which is self-explanatory
- Building a scalable business model -- making your business more efficient before taking on huge amounts of growth capital
- Sprinting to liquidity -- using the growth capital to expand rapidly to at least $100 million in revenue
- Running the marathon -- continuing to manage a public company that grows at least 20 percent a year
2. If You Want to Grow Beyond Your First Customers, Build a Scalable Business Model First
WeWork -- like Uber and many other companies these days -- went directly from stage one to stage three. And its investors are paying the price. So my strongest piece of advice is that if you have successfully completed stage one, go directly to stage two rather than skipping it.
A scalable business model throws off cash because its key business processes -- such as selling and customer service -- get much more efficient as the company grows very rapidly. Companies should do this after they win their first customers rather than sprinting to liquidity by pouring gasoline on a cash-burning business model to expand into new locations.
In case you're thinking that all startups skip the scalable business model stage, think about Zoom Video Communications. For the six months ending in July 2019, Zoom's revenue nearly doubled to $268 million while it made a profit of $5 million and threw off $53 million in cash from operations, according to its latest quarterly statement. Since Zoom's IPO, the shares were up 16 percent to about $74 on October 3.
A key to its scalable business model is that Zoom cares about customers more than its CEO thinks rivals like Cisco's WebEx do. One customer I interviewed said that Zoom's service was easier to use, cloud-based, did not require a hardware investment, and came with a pricing model that made it convenient to try without an investment.
3. If You Don't Know How to Build a Scalable Business Model, Hire Someone Who Has Done It Successfully
Are you cut out for building a scalable business model? If you haven't done this in the past, you ought to ask (and collect objective data to answer) the following questions:
- Can you pinpoint and fix your most inefficient business functions?
- Can you hire and motivate experienced executives to make those functions scalable?
- Can you formalize a culture of customer focus and efficiency?
- Can you hold people accountable for boosting your company's revenue and profits as it grows to $100 million and beyond?
4. If That Person Needs to Be CEO, Be Rich, Rather Than King
If you answer no to most of these questions, you may need to step aside as CEO to make room for an executive who has done it all successfully in the past. That will hurt you personally -- but might make you rich.
These four steps can help you avoid WeWork's unpleasant fate.