What PR Firms Can Learn From the WeWork Debacle

Several years ago, I was a guest speaker at two WeWork “Lunch & Learn” seminars, discussing mergers and acquisitions and strategic planning to a diverse group of businesses gathered at the office-sharing company.

I was impressed with the WeWork model. It was a collaborative, fun environment, encouraging people to network and cross-refer business opportunities. The company attracted startups, tech firms and established brands that needed a satellite office. One of my clients — who had been in the business for more than 30 years and didn’t want to renew a long-term lease — decided to set up shop at WeWork (and was very pleased with the space).

WeWork, founded in 2010, sent a jolt throughout the global real estate market virtually immediately. For a while, it was the largest office tenant in New York City, surpassing J.P. Morgan Chase. Adam Neumann, co-founder and CEO, was a media darling. Heavy investment (and heavy debt) made WeWork a shiny example of an innovative business model, creating enormous wealth.

Everything was going gangbusters. Until it wasn’t.

In a stunning reversal, WeWork’s business tanked, as the rising debt ended up torching the company. Amidst a failed IPO, the company’s valuation dropped to as a low as $5 billion, in November 2019, from $47 billion in August.

SoftBank, the largest investor in WeWork, has announced a bailout plan. The company cut 4,000 jobs, according to the New York Times. Neumann is out, (with a golden parachute reportedly worth $1.7 billion, which has drawn the wrath of employees). And the financial lawsuits of all sorts are sure to follow.

Despite the esprit de corps, I was skeptical of WeWork’s financial model, investing billions into offices, build-outs and workstations. WeWork grew way too fast, overextending itself and chomping up real estate like there was no tomorrow.

What’s more, the company lavished itself with perks senior executives probably knew they couldn’t pay for, e.g., Neumann treating himself to a $60 million private jet and chartered helicopter to flit between Manhattan and the Hamptons. So it wasn’t very long that the brand went from being hailed as one of the great disruptors of the tech age to a case study in the excesses of debt and delusion.

WeWork’s story is as old as the hills. And, despite the accelerating rate of change whipping through the creative services industry, so are the lessons learned. Here are several for agency owners and managers (and startup firms, in particular) to consider in the wake of WeWork’s implosion.

  • Any business model predicated on huge cash investment and debt is risky at best. There will always be exceptions, but they are rare. The concept of WeWork — reasonably priced office sharing with as little as a monthly commitment — offered a terrific opportunity for startups, freelancers, consultants and small businesses to collaborate and work in a large office environment. But the model turned out to have no foundation. The bubble always bursts.
  • Executives leaving secure jobs to work for a new firm should be metaphysically sure to have a solid, fair severance package, should things start to head south. Hope for the best, plan for the worst.
  • Build a profitable, sustainable business. Don’t focus solely on top line growth, and the next few business quarters. Stay aligned with the market, don’t get too far ahead of yourself.
  • The priority should be consistent profitability, preferably at 20% or more. Shoot for “Maximum Valuation” of your firm, which is, ultimately, based on maximizing profitability. Revenue growth should be controlled growth. Don’t get your wings clipped by overservicing. In order to grow PR firms must have an ongoing strategic plan, with written goals and benchmarks for growth, labor costs and profitability.
  • A firm showing deep losses needs a reality check and immediate change of direction. This may entail closing offices and/or cutting staff, which may be necessary to assure the survival of the firm. To avoid that scenario, managers must keep a sharp eye on both the top and bottom lines and not let the value of the company slip without taking legitimate action.

 

Rick Gould is managing partner of Gould+Partners.