- REUTERS/Eduardo Munoz
- WeWork filed for its initial public offering on Wednesday morning, which revealed and confirmed a number of different things about the office coworking company.
- In particular, the “Risk Factors” section of the document highlights many of the issues that critics of WeWork have leveled.
- Everything from conflicts of interest involving CEO Adam Neumann to the unpredictable nature of the real estate market is highlighted. We break down the full list below.
- Read all of BI’s WeWork coverage here.
- Visit Business Insider’s homepage for more stories.
The office co-working company valued at $47 billion, WeWork, filed for its initial public offering on Wednesday morning.
In order to begin that process, WeWork had to publicly disclose a trove of information about itself that was previously rumored or outright unknown. The first such revelation came up front: A staggering net loss of $1.6 billion in 2018 on revenue of $1.8 billion.
But that’s far from all the filing document has to offer – a section labeled “Risk Factors” details the major issues WeWork believes it could face. We break down the most important of those potential issues below:
1. WeWork has grown rapidly, and that growth may not be sustainable.
Throughout the risk factors section of WeWork’s S-1 initial public offering filing, the company lays out risks directly associated to its meteoric rise:
- “Our rapid growth may not be sustainable.”
- “Our business has grown rapidly, and we may fail to manage our growth effectively.”
- “We may not be able to continue to retain existing members, most of whom enter into membership agreements with short-term commitments, or to attract new members in sufficient numbers or at sufficient rates to sustain and increase our memberships or at all.”
- “We may not be able to compete effectively with others.”
And those are just some of the ways WeWork details risks related to its rapid ascent.
Indeed, WeWork has expanded swiftly across the last several years – and with that expansion came spiraling losses: In 2016, WeWork lost $429 million on $436 million in revenue; in 2017, that loss increased to $890 million on $886 million in revenue; and in 2018, WeWork lost $1.6 billion on $1.8 billion in revenue.
The bigger WeWork has gotten, the more money it has lost.
2. The world is unpredictable, as is business.
A less WeWork-specific section of risks is dedicated to the realities of business – the global economy could take a dive, or local markets could drive down rental prices, or business partnerships might go fickle.
Many of the risks listed below could apply to most business ventures in the modern world:
- “An economic downturn or subsequent declines in market rents may result in increased member terminations and could adversely affect our results of operations.”
- “Our business strategy includes entering into new markets and introducing new solutions, products and services. This strategy is inherently risky, may not be successful and could be costly.”
- “A significant part of our international growth strategy and international operations will be conducted through joint ventures, and disputes with our partners may adversely affect our interest in these joint ventures.”
- “Supply chain interruptions may increase our costs or reduce our revenues.”
- “Our growth and success depends on our ability to maintain the value and reputation of our brand and the success of our strategic partnerships.”
- “If our pricing and related promotional and marketing plans are not effective, our business and prospects may be negatively affected.”
- “We may be unable to adequately protect or prevent unauthorized use of our trademarks and other proprietary rights and we may be prevented by third parties from using or registering our trademarks or other intellectual property.”
- “We face risks arising from strategic transactions such as acquisitions and investments that we evaluate, pursue and undertake.”
3. WeWork has a long history of losses.
Though WeWork is valued at $47 billion by investors, the company reported net losses for the past several years. In 2018 alone, WeWork posted losses of $1.6 billion on $1.8 billion in revenue.
Frankly speaking, WeWork hasn’t turned a profit yet – and that’s a massive risk for all investors.
That risk factor is described as such: “We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level (as determined in accordance with GAAP) for the foreseeable future.”
Why does WeWork keep posting losses? Because of its aggressive investment strategy that WeWork says is, “required to grow our business, including the significant increase in recent periods in the number of locations we operate.”
Moreover, that investment strategy isn’t stopping any time soon (emphasis ours):
“We expect that these costs and investments will continue to increase as we continue to grow our business. We also intend to invest in maintaining our high level of member service and support, which we consider critical to our continued success. We also expect to incur additional general and administrative expenses as a result of our growth. These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future.”
4. The real estate market is a mess.
The primary function of WeWork is as a real estate company that pairs workers with places to work. That involves the leasing or outright purchase of properties, maintaining those properties, and navigating the rental market.
As such, some major risk factors are directly tied to the real estate market:
- “We may not be able to successfully negotiate satisfactory arrangements in respect of spaces that we occupy, or renew or replace existing spaces on satisfactory terms or at all, any of which will necessarily constrain our ability to grow our member base.”
- “The long-term and fixed-cost nature of our leases may limit our operating flexibility and could adversely affect our liquidity and results of operations.”
- “We are exposed to risks associated with the development and construction of the spaces we occupy.”
- “We incur costs relating to the maintenance, refurbishment and remediation of our spaces.”
5. There are some major risks specifically tied to CEO Adam Neumann.
- Adam Neumann
WeWork CEO Adam Neumann has some very personal ties to the company he runs. Some of the properties that WeWork leases, for instance, are owned by Neumann.
Additionally, his wife, Rebekah Neumann, is WeWork’s “Chief Brand and Impact Officer.” She also makes up one-third of the succession board “in the event that Adam is permanently disabled or deceased.”
Here are just a few of those conflicts of interest:
- “We are party to lease agreements for four commercial properties with landlord entities in which Adam has an ownership interest.”
- “Our future success depends in large part on the continued service of Adam Neumann, our Co-Founder and Chief Executive Officer, which cannot be ensured or guaranteed.”
- “We have engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of operations.”
- “We have entered into certain agreements that may limit our ability to directly acquire ownership interests in properties, and our control and joint ownership of certain properties with third-party investors may create conflicts of interest.”
“Our Co-Founder and Chief Executive Officer has control over key decision-making as a result of his control over a majority of the total voting power of our outstanding capital stock.”
6. WeWork prioritizes its mission over short-term profit.
- REUTERS/Eduardo Munoz
In multiple instances, WeWork mentions the possibility of moral stances “consistent with our mission” that could adversely affect business.
What is WeWork’s mission? “Create a world where people work to make a life, not just a living.”
As such, some business decisions may adversely impact the bottom line in the “short- or medium-term operating results,” but the company sees those decisions as beneficial in the long term.
7. And, of course, there’s always the risk of a massive data leak.
- Original WeWork Building at 154 Grand Street in NYC’s SoHo.
In a world where data breaches are commonplace, it’s no surprise that WeWork lists a massive breach of client data as a major potential risk:
“If our proprietary information and/or data we collect and store, particularly billing and personal data, were to be accessed by unauthorized persons, our reputation, competitive advantage and relationships with our members could be harmed and our business could be materially adversely affected.”
Considering Capital One just had a major data breach, and we’re still dealing with the fallout from the Equifax data breach, it’s safe to say that literally any company is at risk of one.
- Read more of Business Insider’s WeWork coverage:
- WeWork just filed to go public – Check out the company’s journey from one SoHo building to a $47 billion valuation
- WeWork’s founder and CEO didn’t take a salary last year as the company prepared for its massive IPO
- WeWork is going public with an extremely weird, complicated structure
- The life and career rise of Adam Neumann, the billionaire WeWork founder and CEO taking his company public
- WeWork is just one of the businesses owned by the $47 billion company that just filed for its IPO – check out the full list