A deep dive into the financials of the WeWork Case Study - Profit

BottomUp - Skills for Innovators

004 - WeWork Case Study - Profit

Mike: [00:00:01] Hello, and welcome to the BottomUp podcast. This is episode four. I'm your cohost Mike Parsons, and as always, I'm joined by the man with the plan himself. Mr. Chad Owen.
Chad: [00:00:13] Here we are at the profit-focused WeWork case study show Mike, and we're going to talk all the numbers big and small, negative and positive, the ups and the downs. I'm like real excited to, pick apart why I think, WeWork failed ultimately. And that was really just a lack of fundamentals, in their profit, aspect.

And, and when it comes to breaking down businesses in the four P's.

Mike: [00:00:40] Totally. It's such a powerful lesson. And I know if you've been tuning into the earlier episodes, we've had a lot of positive, things to say about WeWork despite what everyone is saying these days. The truth really is they did build a good culture. They did build a great product. It did disrupt a category.

They really did a thing there. But the truth is, when we look at the numbers, there is like a huge distraction in the numbers and that is the ridiculous growth of this company. Let me put it into perspective for you. So, we've got a slide on our case study that you can get at bottomup.io and this is it.

In, 2015, they had 40,000 members at WeWork. By 2019, they had over 400,000. So, it's like a 10 X increase in a very short time. That is one steep line of growth as the same thing with their locations from over 50 to over 500 and year on year from 16, 17 to 18 they enjoyed 100% growth in their revenues each year.

Now, any company that can grow 10% a year is happy on the top line. These guys were growing 100% so you did a million on year one. You do, 2 million on year two? That is so, so off the charts. it's, really, Tremendous growth, and that's when you've got a great product and you've got great promotion.

These things do tend to work out, don't they?

Chad: [00:02:18] Yeah. WeWork opened half of all of their total locations in the last 10 months. They were opening four or five locations a week across the globe.

That is. How quickly they're growing. Imagine having to open up, you know, a hundred thousand or 200,000 square feet of office space, fully staffed and furnished and built out.

Not every week or every month, but every single day.

Yeah, the growth is, mind-boggling.

Mike: [00:02:51] Yeah. And to put them in perspective, you know, when you've been in the office and someone says, let's change the office, or let's move to a different floor. This is a massive. Like undertaking. Just something we can relate to. So when you think about the build-out of a new place, the utilities, the furniture, health, and safety, or the facilities, employing the staff, getting all the fobs to work, like the amount of things that can go wrong on a new office build is incredible.

But somehow, they grew like crazy. And as I said earlier, total distraction because, in a culture where everyone was looking for hyper-growth companies. Investments came quick and fast to WeWork. However, there was already a publicly listed company that we compare in this case study is called IWG, and many of you might know this largely from a brand they have in market called Regis, who technically were in market, quite a time before WeWork.

But the crazy thing is that they had a business similar to WeWork. They weren't promising to be a tech company. Many of their fundamentals were actually significantly better.

Chad: [00:04:01] They turned a profit. How novel

Mike: [00:04:04] Should we start with; they actually made some money. but they did really smart things. Chad, they had what we call recession clauses in their leases.

So, if, their property experiences recession, then they are actually able to renegotiate their lease down. Now, which competitor of theirs not only took leases at the top of the market but did not include any recession clauses? Can you name to me which company? It starts with W and ends in work

and this is the problem right.

Chad: [00:04:39] there's an interesting, a chart that just shows the fundamentals of both of the businesses and the biggest ones that stand out to me is they have similar square footage. They have a similar number of workstations, but the biggest two differences is WeWork has lost billions of dollars, and IWG has made some money.

But this evaluation of WeWork at the time was $47 billion and IWG was just shy of four. So WeWork was getting tech company like, you know, priced earnings valuations that a tried and true, hospitality real estate company just could never, get. So going back to this promotion, the previous episode, you know, WeWork was definitely selling themselves as a new kind of company, a new tech-focused company, so that they wouldn't be put in the same category as a company like IWG that actually has sound business fundamentals.

Mike: [00:05:37] Yeah. So, this is what I talk about, the distractions. So, the growth of WeWork distracted everybody. and once they actually filed their S1 and people could see the real numbers, things just simply didn't add up. And, what's interesting about this is it really challenges us to find, the rigor to go deeper than just like, are we growing, or I can imagine a lot of startups are like, do we have a bunch of customers?

How many new customers did we get? Because those are good questions. But I think what WeWork illustrates is a far bigger learning. And in order to get into that chat, I want to share with you what I think the big problem with WeWork was. Are you ready?

Chad: [00:06:31] Lean on me.

Mike: [00:06:32] All right, here we go. Here we go. So, what's really interesting in the S1 filing, if you look at the revenues of WeWork, between 2017 and 2018 they went up. $1 billion. So, any company that can sit there and say, Hey, our revenue is up $1 billion year-on-year, you're like, awesome. Right? Party time, or as in Adam Newman's case.

Bring on the tequila. Now, what is really interesting is if you look at their cost structure and cost base at the same time, I think we can uncover the real problem. So, in the same period that the business grew by a billion, they actually increased their losses by a billion. So, what this means, Chad, is if you get $1 billion in growth, is it costs you $1 billion to get.

Therefore, what was the point?

Chad: [00:07:28] They had negative margins. Like how crazy is that? For every dollar they make, they spend two. So, you have negative a hundred percent margins. It's not a business that's a money pit.

Mike: [00:07:38] It's, one of those situations, Chad, where like you see these top line of growth, but if you actually have the capacity to go rigorously, almost forensically, it brings you to this big idea. I think this is the biggest learning, not only for this episode but of all the four episodes that we're doing on WeWork, I think this is where it comes to, it's called customer acquisition costs.

Okay, it's a very simple formula, but the real truth here is that WeWork, were totally preoccupied with the number of new customers, but they never address that through the lens of what are the total costs of our sales and marketing operation and how man...