Private firm WeWork, which is considered the biggest tenants in New York as it has acquired 5.2 million square feet of rented space scraped plans to launch its IPO last week. Though experts from Wall Street believe that this failed IPO is a harbinger of several such offerings in the market, they could be far from actual truth as the problem lies with WeWork’s flawed business model. The firm works on a unique tenant-landlord business model that involves renting out large commercial spaces and then turning them into uber- modern workspaces. These are then rented out to small and large corporates on short term leases. In some cities it owns the buildings which are refurbished and leased out to startups and established corporates. The concept is perfectly suited to startups and small businesses and entrepreneurs that want to use the opportunity to network with likeminded people.
This setup also suits large companies that want to have a presence in a large city without going through the steps of setting up an office and staffing it with people or entering into long term contracts. But too much of space in the properties owned by WeWork is dedicated to non-revenue making regions like communal couches, cubbyholes and regions for casual chit-chatting.
This model becomes problematic in high rent cities like NewYork, London and Washington DC where commercial space comes at a hefty premium. Though the firm has not faced any economic lows it has not been able to make any profits even in buoyant economic times. During the first six months of 2019 it managed to make $1.54 billion in revenues and accumulated losses of $689.7 million. It is therefore not a surprise that IPO was not greeted enthusiastically by the market keeping in mind that its controversial CEO and Cofounder Adam Neumann sold stock worth $750 million leading up to the IPO.