Foreign, The co-working company Wework has raised over 22 billion dollars since its launch in 2010 and has never once turned a profit. Their Journey once heralded as a future of office spaces, has been marred by Financial pitfalls and strategic missteps. In 2019, the company's bold moved to go public with a staggering 47 billion valuation was met with skepticism due to its exorbitant cash burn. This debacle Force Wework's largest shareholder SoftBank to pour even more money to bail them out and they fired CEO Adam Newman with renewed hope and Leadership Wework asserted its intention to steer towards profitability and in 2021 opted for a merger with a stack, valuing it at nine billion dollars.

However, in 2023, Wework issued a so-called Going Concern notice, which is a counting speak for. about to go bankrupt today. with its stock price plummeting 98 to a mere 20 cents per share, we're finally reaching the end game, cementing Wework's Legacy as the most colossal cash sinkhole in Venture Capital history. In this video, we'll look at why Wework was given so many second chances by investors and why it looks like the curtains have finally closed in on this decade-long disaster.

Over the past decade, SoftBank has lost an estimated 17 billion dollars attempting to prop up Wework, making it one of the most expensive investing disasters in history. In hindsight, they would have been a lot better off investing in government bonds instead, thanks to the Fed's rate hikes, Treasury Bonds now offer yields as high as five and a half percent, which is backed by the full faith and credit of the US government. Had they not blown their 17 billion dollars on Wework, they could be making almost 1 billion dollars per year, lending money to the US government and thanks to today's video sponsor, public buying treasury bonds has never been easier. In the past.

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They assign multi-year leases to rent large amounts of space and Office Buildings they add a bunch of amenities in common Lobby areas to make the working environment more attractive. They then sublease the space to end customers, which are usually small companies and startups. There are a few benefits to the Wework model. Firstly, the failure rate of startups is very high.

Traditional landlords often won't rent to startups because they may go bankrupt before the lease ends. Because Weworks lease terms are very short, they're willing to take on these more risky tenants even if you don't go bankrupt. If you want to increase or decrease your head count for whatever reason, you can adjust the number of seats you rent from Wework on a very short notice. Secondly, the various amenities like ping pong tables and free beer provide a unique experience for workers.

If you're hiring workers and tell them you'll put them in a Wework, this may help you attract and retain. Talent These advantages should enable Rework to send rental rates for their tenants higher than what they pay to the building owner in their long-term leases, allowing them to make a profit at least in theory. We can break down Reworks history into two distinct periods. The first period lasted from 2010 through 2019, under the leadership of founder.

Adam Newman The company's strategy was defined by profligate spending and growth at all costs. This included extensive interior design work and large lobbies in common spaces. They even gave free beer to tenants at many of their locations. This made their co-working spaces extremely popular, especially with tech startups who felt a cultural fit with the Wework vibe.

Newman Also spent exorbitant amounts of corporate funds on private jets and other questionable expenditures. This ultimately resulted in the company burning billions of dollars of investor money by 2019. Adam Newman's incompetence caused the company's cash brand to accelerate to a shocking two hundred thousand dollars per hour. They were running out of cash and needed to raise more capital from investors if they wanted to keep the lights on the Japanese technology.

Giant Soft Paint was Wework's largest shareholder and it pumped well over 10 billion dollars into the company. They finally lost patience with Newman and fired him. SoftBank still believed in the co-working business model. They thought if they could just replace Newman with a competent CEO they could finally turn things around.

In February of 2020, Wework appointed Sandeep Mathrani to be its new CEO Matrani had a long and impressive resume. Having served as CEO and other senior executive positions at multiple large real estate companies, Mantrani couldn't have taken the job at a worse possible time. Within a month, the coveted pandemic completely disrupted the entire real estate industry. With employees forced to work from home.

Wework was especially hard hit because of the short-term nature of their contracts. Their revenue tanked almost immediately. Given the company's desperate financial position, Matrani wasted little time implementing massive Cost Cuts This included laying off two-thirds of their Workforce and shutting down dozens of underperforming locations. They also axed much of the corporate excess from the Newman era, including selling off the 50 million dollar private jet.

by the beginning of 2021, it looked like the Cost Cuts were working. Wework was still losing money, but the losses had decreased dramatically and with the coveted pandemic ending, things looked set to improve. So they went public by merging the spec at a 9 billion valuation. It's important to note that by this point, Wework's previous financial troubles were well known and extensively covered by the media.

Hulu made a full-length documentary about it Adam Newman's strange and outrageous Antics became something of a meme in pop culture, so it's quite an amazing accomplishment that they could convince new investors to roll the dice again on Wework, which was still losing more than a billion dollars per year. They claimed that since 2020, they had cut close to 2 billion dollars of annual cost. During the Adam Newman years we work acquired or invested in a number of startups, including the social media platform Meetup a private education company called the Flatiron School, and a workplace management software company called Space IQ just to name a few. these startups were losing money and were only tangentially related to the core business.

Weworks management was able to cut costs by selling or shutting down all these. Ventures Secondly, during the pandemic, Wework was able to negotiate rent reductions from some of its landlords. Given the deteriorating health of the office real estate market in general, they cut back on a lot of the freebie. It's like free beer and drinks for tenants.

The main sales pitch was that at its core we work at a profitable business model. The reason they lost money in the past was because of the profligate spending under Adam Newman With the new professional management team, they were well on their way to cleaning up the mess that. Newman Left Behind They claimed that after their Cost Cuts we worked only needed 70 occupancy to break even pre-coveted made occupancy well. Above This Level in most of their locations, occupancy fell to a low of 46 in 2020 due to the pandemic.

But with the economy reopening and say a home order is being lifted, Break Even should be imminently achievable. Also, there was an argument to be made that Wework would be a major beneficiary of the post-coveted hybrid working culture. Many employees prefer working at home, so as a compromise, many companies now allow their workers to only come to the office three days a week, for example, and work from home. The other two days Wework stood to be a major beneficiary.

from this trend, the flexibility of the co-working model meant that companies only had to pay for as many seats as they needed on any any given day. Mad Money Hosts Jim Cramer who was previously a major critic of the company, completely changed his tune and became a major Wework bowl. I'll tell you what's really compelling about this and it's Barry Sterling's quote I Happen to be big Tim Barry Yeah, it got a bit of a Midas Touch he's in the pipe. Yeah, and he is saying uh, wework as the leader in flexible space.

Well, what do we need more than than anything else? Who knows who's coming back and who's not. Is there a way we can get some flexible space? Well, we work hazards so some it's kind of like it is. Just as it wasn't the company we needed. Uh, a year ago, it is the company we need now.

I thought I I Have to tell you. uh I have been very critical of the recent a lot of specs I'm not critical about this one. Plus, there's a lot of heavyweights involved with the Cost Cuts hybrid work Tailwinds and 1.3 billion dollars of new capital from the stack. It looked like Wework was finally on track to build a sustainable business.

foreign. ERS Following the IPO Wework seem to be doing pretty well. Their occupancy steadily increased, eventually reaching 73 percent by the first quarter of 2023. This happened a few quarters after they originally anticipated, but they nevertheless achieved their target.

Remember, they said at 70 occupancy, they would be break even on adjusted ebitda as their occupancy increased. So too did their contribution. Profit Contribution Profit is revenue minus direct building level expenses. This includes things like rent, the receptionist, maintenance utilities Wi-Fi Etc Basically all the costs incurred within the building itself.

This does not include their corporate level staff such as managers and sales people and accounting lingo. These overhead costs are called selling in general administrative expenses or SG A. There are two ways to achieve profitability. You can either increase your contribution, profit, or decrease your SG A.

Wework did both. They've continued to cut costs. While their occupancy has increased, The fourth quarter of 2022 was their best quarter ever. They generated 137 million dollars of contribution, profit and incurred 150 million dollars of SG A.

Thus, their adjusted ebitda was negative. 13 million dollars almost break even the adjusted ebitda. I'm using here is slightly more generous than the version Wework reports because I exclude pre-opening expenses. We are only looking at locations that are already operational.

However, in their next quarter, their adjusted ebitda decreased. That's because their occupancy reverses prior upward Trend and decreased from 75 percent to 73 percent. When you start laying off corporate staff, you reduce your cost and your profit increases. But eventually you lay off so many workers that your ability to function as a company diminishes and your Revenue decreases.

At some point, the decrease revenue is greater than the cost savings. Wework has reached this point. They had long since laid off all their unnecessary employees. Any further costs would make their profitability situation worse, not better.

After cutting costs to the Bone Weworks Sgnas expense was still hovering at around 17 percent of revenue. For comparison, let's look at Boston properties, which is one of the largest office reads in the US and happens to be one of Wework's landlords. They have SG A of about five percent of Revenue. So why is Reworks SG a so much higher? The main corporate function of a real estate company is leasing out their office space.

You need to pay a salesperson or external agent to show potential tenants around the property and convince them to sign the lease. Once the building is rented out, the landlord doesn't really have to do anything. they just collect the rent For traditional. Office Buildings Tenant turnover is very low.

Tenants typically sign initial lease terms of about three years, and if they're happy, they typically renew. It's not uncommon for large corporations to use the same office space for 10 or even 20 years. That's why the SG a expense of traditional office reads is so low. Because tenant turnover is so infrequent, they only need a tiny corporate staff to manage a huge number of Office Buildings Weworks business model is completely different.

Their tenants tend to be small startups and their customer turnover is multiple times higher. So Wework needs a much larger corporate staff and a never-ending struggle to replace lost tenants. So why is Wework's turnover so high? Remember that we work, rents their office space from traditional landlords, and sublets them as flexible short-term Spaces By definition, Wework must charge a far higher rent per square foot than a traditional landlord. The New York-based Commercial Real Estate brokerage office space is New York Published a cost comparison of reworked versus traditional office spaces.

Admittedly, this is a biased Source because they make money by renting out traditional office space, but the results are broadly in line with what I've read from other sources as well. They calculated that renting out enough space for 40 employees in New York City would cost forty five thousand dollars per month that Wework versus just thirty thousand dollars per month at a traditional office space. Not only that, but at Wework, you only get 3 000 square feet compared to six thousand square feet at a traditional office. so you pay 50 more for half the space in an effort to maximize.

Revenue We were crams as many seats as possible into their Office Buildings Workers are packed together like sardines with very little personal space, making it extremely loud and difficult to concentrate. Basically, it's a worse experience at a higher price. The only reason to use a Wii work is if you're a small company with just a handful of employees. Most traditional offices have a minimum amount of space you have to rent, so if you're too small, it won't work.

These small startups have inherently High turnover because they will either grow large enough to rent a traditional office space or go bankrupt. Either way, they leave Wework. Wework does have some large Enterprise customers including City Google and Salesforce just to name a few, but these large companies only use Wework for very specific purposes. We can see this in a case study published by Wework itself.

A growing Healthcare technology company based in Boston needed space for expansion in the local market as well as several new markets, so they use Wework. If you're a big company and for whatever reason, you want to expand into a new market quickly, Wework may be a better choice in the short term. It's much faster to move into a Wework because it's already furnished and in the early days of your expansion, you might not know how many employees you're going to need in the new city. After a year or so, your expansion May underperform expectations and you'll shut it down with so much uncertainty, The company won't want to take the risk of committing to a multi-year traditional office lease, But once you settle down in the city and decide you're there to stay, you'll leave Rework and get a proper office.

Wework is so expensive that it can only be justified on a temporary basis. Wework was founded 13 years ago and has raised a cumulative 22 billion dollars of equity. capital is burned through substantially every penny of it, and is still not profitable, even after cutting costs to the Bone, They're still making an adjusted ebitda loss, not even considering interest, expense, or depreciation. Replacing the CEO or tinkering around at the edges isn't going to fix this.

It's a fundamentally broken business model that just doesn't work. As of June 30th, 2023, the company had 200 million dollars of cash in the bank and total liquidity of 700 million dollars. If they max out their credit lines, the company is burning cash at a rate of 500 million dollars per quarter. they're reaching their final hour.

In their most recent regulatory filing, they admitted as much saying substantial doubt exists about the company's ability to continue as a going concern. This is accounting lingo for we're about to go bankrupt. With the share price now sitting at 20 cents, it's very hard to see how they could raise enough Capital to make a difference. Even if they could somehow raise another couple hundred million, this would only delay the inevitable rework.

will go down in the history books as perhaps the most costly and stupid disaster in the history of venture capital. Alright guys, that wraps it up for this video. What do you think about Wework? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.