WeWork’s Path to Turnaround Challenged by Tainted ‘Cool Factor’

(Bloomberg) -- Co-working wasn’t new when WeWork came along, but the office-sharing company made it cool, enticing millennials and entrepreneurs with amenities like hip furniture, beer on tap and puppy parties.

Now, after a botched initial public offering, the ouster of founder Adam Neumann and a $9.5 billion bailout from SoftBank Group Corp., the startup faces an uncertain future as it tries to mount a turnaround with its brand tainted by weeks of financial turmoil.

“There was a cool factor that has blown up into bits,” said Eric Schiffer, chairman of Reputation Management Consultants, a crisis public relations firm. “The debacle that occurred under Adam Neumann’s management is highly damaging to WeWork.”

Several deals involving WeWork have already gone awry. WeWork pulled out of an agreement to rent space in Dublin and Google walked away from a potential Toronto lease with the firm after months of negotiations. Landlords across New York, London and Toronto are also reaching out to its competitors to see if they will take over WeWork leases.

‘Slow and Steady’

WeWork’s valuation soared to $47 billion as recently as January, largely because it had brand appeal that its rivals didn’t. But as the company struggles to find its footing, there’s an opportunity for competitors to “come in take over some of that business,” said Tamara Lawson, chief financial officer at QuadReal Property Group.

WeWork’s chief rivals -- including IWG Plc, Industrious, Knotel and Convene -- are pitching their stability.

“Slow and steady wins the race: having very little debt and being very cautious,” said Mark Dixon, the billionaire founder and chief executive officer of IWG, which operates the flexible-office brands Spaces and Regus. “It’s boring at times but that is what it takes in this industry.”

WeWork, set to run out of cash as early as next month, shored up its finances with a rescue package from SoftBank that valued the company at less than $8 billion. The Japanese conglomerate, already the startup’s largest shareholder, now has an 80% stake and one of its own top executives, Marcelo Claure, is WeWork’s executive chairman.

In a memo to employees, Claure said WeWork has “all the necessary ingredients to make this one of the most amazing comeback stories ever, and prove our detractors wrong.”

“I know firsthand the power of the WeWork brand and the quality of our product,” Claure wrote, while also acknowledging that the company would lay off employees and “right-size” its business as it seeks to become profitable.

A representative for WeWork declined to comment.

As the company struggles to find its footing, it could focus on “asset-light” ways of expanding, such as management agreements with landlords instead of outright leases, according to Danny Ismail, an analyst at Green Street Advisors.

Still, the firm’s reputation may “negatively affect their ability to enter into those management agreements and to expand in more sustainable ways,” Ismail said.

Cheaper Rents

While WeWork may struggle to draw new tenants, the company’s fall from its lofty perch could be an opportunity for potential new tenants to negotiate cheaper rents.

Nate Wright, founder of a marketing firm called Small Biz Triage, has shied away from renting space at WeWork because of the high rents. Now, he’s hoping the price will come down.

“Regardless of what’s going on publicly, they have great facilities,” said Wright, who is interested in space in Dallas and Los Angeles. “When they’re in a tough spot, we might be able to actually get more advantageous pricing.”

For some existing clients at WeWork locations, it’s business as usual. The company recently opened a location at a new office building in the Brooklyn Navy Yard called Dock 72. Entrepreneur Jurrien Swarts said it’s perfect for his business Stojo, which makes collapsible, reusable cups and has a dozen employees.

Swarts also likes that he can pop into WeWorks around the world to have coffee and meet other members amid “chill vibes, nice light, a comfortable atmosphere and great Wi-Fi.”

He said he separates the flashy antics and controversy surrounding Neumann from the broader promise of co-working.

“That doesn’t impact how I feel about the business,” he said. “My employees love going to work -- people are literally happy to roll through the front door.”

--With assistance from Gillian Tan.

To contact the reporter on this story: Natalie Wong in Toronto at nwong133@bloomberg.net

To contact the editors responsible for this story: Craig Giammona at cgiammona@bloomberg.net, Christine Maurus

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