Harvard Case - WeWork - November 2018
"WeWork - November 2018" Harvard business case study is written by Paul A. Gompers, Patrick Sweeney, Alex Gachanja. It deals with the challenges in the field of Finance. The case study is 30 page(s) long and it was first published on : Apr 1, 2020
At Fern Fort University, we recommend WeWork focus on a refined growth strategy that prioritizes profitability over rapid expansion. This involves a strategic shift towards asset-light model with a greater emphasis on financial discipline and risk management. This recommendation is based on a comprehensive analysis of WeWork's current financial situation, market dynamics, and potential future challenges.
2. Background
WeWork, a co-working space provider, experienced rapid growth from 2010 to 2018, fueled by a venture capital-backed expansion strategy. The company had a unique business model based on long-term leases of office spaces, which were then subleased to individual members and companies on a flexible basis. This model offered convenience and flexibility to its users but also led to significant financial risks and operational complexities.
The case study focuses on WeWork's struggles in 2018 as the company prepared for its initial public offering (IPO). The financial statements revealed concerns about its profitability, cash flow, and debt levels. The company's valuation was also questioned, leading to a delay in the IPO and a significant decline in its stock price.
3. Analysis of the Case Study
The case study highlights several key challenges facing WeWork:
- Unprofitable Growth: WeWork's rapid expansion came at the cost of profitability. While the company was generating significant revenue, its operating expenses were also high, leading to consistent losses.
- High Debt Levels: WeWork's leveraged buyout model resulted in a significant amount of debt, putting pressure on its cash flow and financial stability.
- Valuation Concerns: The company's valuation was based on its projected growth, which was questioned by investors due to its uncertain profitability and high burn rate.
- Competitive Landscape: The co-working space market was becoming increasingly competitive, with new entrants and established players vying for market share.
- Operational Challenges: WeWork's complex business model involved managing multiple leases, subleases, and member relationships, leading to operational inefficiencies and risks.
Financial Analysis:
- Balance Sheet: WeWork's balance sheet showed a high level of debt and intangible assets, which raised concerns about its financial leverage and asset quality.
- Income Statement: The income statement revealed consistent losses, despite significant revenue growth. This highlighted the company's high operating expenses and low profitability.
- Cash Flow: WeWork's cash flow statement showed a negative free cash flow, indicating that the company was burning cash to fuel its growth.
- Ratio Analysis: Profitability ratios were low, while liquidity ratios were concerning, indicating potential financial distress.
Strategic Analysis:
- Competitive Advantage: WeWork's competitive advantage was based on its brand recognition, network of locations, and flexible membership options. However, these advantages were not sustainable in the long term without a profitable business model.
- Growth Strategy: WeWork's growth strategy focused on rapid expansion, which was unsustainable and led to financial instability.
- Business Model: WeWork's business model relied heavily on long-term leases and subleases, which created significant financial risks and operational complexities.
4. Recommendations
WeWork should implement the following recommendations:
- Shift to an Asset-Light Model: WeWork should focus on leasing rather than owning office spaces. This will reduce its capital expenditure and debt burden, allowing for greater financial flexibility.
- Improve Profitability: WeWork should prioritize profitability over growth by focusing on operational efficiency, cost optimization, and pricing strategies. This could involve activity-based costing to identify and manage expenses more effectively.
- Strengthen Financial Discipline: WeWork should implement a stricter financial management system, including cash flow forecasting, debt management, and risk assessment. This will ensure the company has sufficient cash flow to meet its financial obligations and avoid future financial crises.
- Refine Growth Strategy: WeWork should focus on selective growth in strategic markets with high potential. This will allow the company to optimize its resources and achieve sustainable growth.
- Enhance Technology and Analytics: WeWork should invest in technology and analytics to improve its operational efficiency, customer experience, and data-driven decision making. This will allow the company to streamline its operations and better understand its customers' needs.
- Explore Partnerships: WeWork should explore strategic partnerships with other companies to leverage their expertise and resources. This could include partnerships with real estate developers, technology companies, or financial institutions.
- Improve Corporate Governance: WeWork should strengthen its corporate governance practices to ensure transparency, accountability, and ethical decision-making. This will build trust with investors and stakeholders.
- Focus on Environmental Sustainability: WeWork should prioritize environmental sustainability in its operations, including energy efficiency, waste reduction, and green building practices. This will enhance the company's reputation and attract environmentally conscious customers.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with WeWork's core competency of providing flexible workspace solutions while focusing on profitability and sustainability.
- External Customers and Internal Clients: The recommendations aim to enhance the customer experience by providing more affordable and efficient services while optimizing internal operations.
- Competitors: The recommendations address the competitive landscape by focusing on differentiation, cost optimization, and strategic partnerships.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve WeWork's profitability, cash flow, and return on investment (ROI), making it a more attractive investment opportunity.
Assumptions:
- The co-working space market will continue to grow in the future.
- WeWork can successfully implement the recommended changes without significant disruption to its operations.
- Investors will respond positively to WeWork's improved financial performance and strategic direction.
6. Conclusion
By implementing these recommendations, WeWork can transform itself from a high-growth, unprofitable company into a profitable and sustainable business. This will involve a strategic shift towards an asset-light model, improved financial discipline, and a refined growth strategy. By focusing on profitability and long-term value creation, WeWork can regain investor confidence and achieve its full potential.
7. Discussion
Alternative Options:
- Continue with the current growth strategy: This option carries significant risks, including increased debt levels, financial instability, and potential for a financial crisis.
- Sell the company: This option would provide immediate liquidity but could result in a lower valuation than desired.
- Focus on specific markets: This option would limit WeWork's growth potential but could improve profitability in certain markets.
Risks and Key Assumptions:
- Execution Risk: Implementing the recommended changes effectively requires a significant organizational effort and may face resistance from some stakeholders.
- Market Risk: The co-working space market is subject to economic fluctuations and competition.
- Regulatory Risk: Government policies and regulations could impact WeWork's operations.
Options Grid:
| Option | Advantages | Disadvantages | Risks |
|---|---|---|---|
| Asset-Light Model | Reduced debt, improved financial flexibility | Potential loss of control over assets | Execution risk, market risk |
| Improved Profitability | Increased profitability, improved investor confidence | Potential impact on growth | Execution risk, market risk |
| Refined Growth Strategy | Sustainable growth, optimized resource allocation | Potential for slower growth | Market risk, regulatory risk |
8. Next Steps
Timeline:
- Quarter 1: Implement an asset-light model strategy by focusing on leasing rather than owning office spaces.
- Quarter 2: Implement cost optimization measures and improve operational efficiency.
- Quarter 3: Refine growth strategy and focus on selective growth in strategic markets.
- Quarter 4: Explore strategic partnerships and enhance technology and analytics capabilities.
By taking these steps, WeWork can position itself for long-term success in the co-working space market.
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Case Description
In May 2017, SoftBank announced the official launch of the Vision Fund - which promptly became the largest technology-focused investment fund in the world, with nearly $100 billion in capital under its management. Reports from a few months prior hinted that SoftBank was weighing a billion-dollar investment deal with WeWork, a commercial real estate company that specializes in shared office spaces. The official launch of the fund was proceeded by a series of multi-billion dollar investments in WeWork, eventually bringing the company's post-money valuation to $42 billion. The development of the Vision Fund had key implications for the late-stage venture capital industry. Moreover, Soft Bank's investments in WeWork raise important questions regarding investment decision-making, asset valuation, and issues surrounding corporate governance.
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