The worksharing giant WeWork was supposed to fundamentally alter the future of the office. It raised billions of dollars, signed leases in office towers across North America but filed for bankruptcy protection last week.
Analysts say it collapsed, at least in part, because it never had a viable business model.
“It didn’t really have a clear path to profitability. It never made any money,” said Susannah Streeter, head of money and markets at the financial services firm Hargreaves Lansdown.
Streeter says WeWork is just the latest in a string of high-profile, well-funded ideas that failed spectacularly.
“This is a lesson for would-be investors not to believe the hype,” she told CBC News.
But the collateral damage of startups celebrated for “disrupting” traditional industries can go far beyond investors — hurting not just the old guard but also customers who are stuck with what’s left.
The damage in its wake
WeWork’s first location opened in New York in 2010, founded by tech entrepreneurs Adam Neumann and Miguel McKelvey.
They built the company on a promise to reshape office culture and used the funds from the sale of their previous co-working startup, Green Desk, to get started.
When it was launched as a publicly tradeable company in 2021 — after Neumann was ousted and McKelvey left — the company’s stock shot up to a market value of $9.4 billion.
In a pre-pandemic world, the idea generated a lot of hype. Big institutional investor SoftBank pumped $6.5 billion US into WeWork and eventually injected another $9.5 billion US in an attempt to save it.
But by then, WeWork was beyond saving. It had stacked up $16 billion US in losses and was paying 80 per cent of its revenues on rent and interest.
And as it failed, it left a lot of damage in its wake.
WeWork had more than 18 million square feet of rentable office space in the United States and Canada at the end of last year, according to a financial filing.
“It will be years before that space is occupied again,” said independent commercial real estate consultant John Andrew.
In a weird twist, he says, the WeWork model would actually make more sense now than it did five years ago, because there’s more openness to flexible work arrangements. But because the company piled on so much debt and focused on growth over quality, it simply ran out of time.
“They were up to their eyeballs in debt, and then we know what happened with interest rates,” Andrew said.
‘How platforms die’
There’s a model here that has played out repeatedly over the past 10 years.
Tech companies move in to disrupt an existing industry. There’s a wave of hype about the innovation. The new service loses money in the hopes of eventually turning a profit.
As often as not, those profits never materialize. But the experiment has fundamentally changed the existing industry.
Author and tech expert Cory Doctorow has coined a term for this process. He calls it “enshittification.”
“Here is how platforms die,” he wrote in an essay first published on his website earlier this year. “First, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves. Then, they die.”
That essay went viral and was republished around the internet. Doctorow’s latest book, The Internet Con: How to Seize the Means of Computation, rails against the way tech companies failed time and again to deliver on their promises to consumers.
He points to Uber, Amazon and Airbnb as just a handful of examples.
In Uber’s case, Doctorow says the company raised billions of dollars that allowed it to operate at a loss. He says the belief was that if the experiment didn’t work, things could just go back to the way they were.
But that’s not what happened.
“What actually happens during that period is both labour and capital are profoundly reshaped,” he told CBC News.
The taxi industry was decimated. In some cases, public transit was reduced as well because prospective riders were simply taking an Uber instead.
He recently got off a train to find there was no connecting bus, no taxis and, as Uber cuts back, there were no ride-hailing services available either.
“That’s the lasting legacy here is that we don’t just have this era in which, you know, small businesses are chased out of the industry, it’s that we then go back to a status quo that’s worse,” Doctorow said.
The promise of streaming
The same story is playing out in the fight between cable TV and the upstart streamers. Netflix crashed onto the scene in 2007 offering a huge library of videos for less than $10 a month.
Customers, exhausted and annoyed by what they saw as exorbitant prices for traditional cable, flocked to the streaming service. Netflix’s success brought in more and more competitors.
That disrupted business and revenue model became a major sticking point this summer during the Hollywood writers’ strike.
“The whole promise was a lie,” said Adam Conover, an executive producer of several hit TV shows and a board member of the Writers Guild of America.
He says Netflix has upended the industry in a lot of ways that regular consumers may not see. The way writers are paid has changed. The way shows are sold has changed.
“They’re trying to turn us into gig workers,” he told CBC News.
For years, he says, all the streaming companies cared about was growth. As long as new subscribers were signing on in huge numbers, they could afford to lose a little money every quarter.
Now, growth has slowed and the streamers are looking for ways to cut costs. They’re adding lower-tier options that include ads. They’re starting to bundle options.
“Five years from now, it’s just going to be cable,” Conover said.
The end of cheap money
When you zoom out, all of these industries are very different. And the startups that challenged them are unique in their approaches. But there’s one common theme: cheap money.
Streeter, of Hargreaves Lansdown, says extremely low interest rates fuelled a willingness among big institutional investors like SoftBank (WeWork) or the investment arm of the Saudi royal family (Uber) to let the startups pile up losses even when the promise of profitability remained murky at best.
“All this was colliding with the fact that during this time, we’ve been in an era of ultra cheap money that needed a place to land,” she said. “Brand power is a really big pull. It’s like a magnet.”
Now, as interest rates have shot up, the willingness to take on risk has plummeted.
“That’s why you’re seeing fewer IPOs, particularly as interest rates ramped up. I think institutional investors are a lot more cautious about pushing money into ventures where the path to profitability isn’t clear.”
And that may well change the way these startups take on existing industries. But it won’t undo the damage done along the way.
