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Down 97% this year! WeWork rumored to file for bankruptcy next week, Lin Zhi Chen analyzes the three reasons why it "doesn't work."

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Down 97% this year! WeWork rumored to file for bankruptcy next week, Lin Zhi Chen analyzes the three reasons why it "doesn

The Wall Street Journal recently reported that WeWork, a shared office space company heavily invested by SoftBank, is rumored to be filing for bankruptcy. Although WeWork has not responded, its stock has dropped over 40% in recent days, and has fallen 97% this year. AppWorks, a Taiwan-based startup accelerator, founder Jamie Lin analyzed the three reasons why WeWork is not working.

WeWork's Net Debt is $2.9 Billion, Bankruptcy Application Expected Next Week

The well-known shared office space company WeWork is on the brink of bankruptcy due to financial difficulties, causing a drastic reaction in the stock market with its market value plummeting far below its peak.

According to a recent report by The Wall Street Journal, the shared office space giant WeWork is facing severe financial crisis, with the risk of bankruptcy escalating. After news surfaced that the company might apply for Chapter 11 bankruptcy protection in New Jersey, its stock price experienced a sharp decline, dropping to just $1.21, hitting a 52-week low, and its market value dwindled to only $121 million. This is a sharp contrast to its valuation of $47 billion at the beginning of 2019, indicating its dramatic downfall.

Following the impact of the pandemic and the trend of remote work, WeWork's business model is facing unprecedented challenges. The company had already issued warnings in its second-quarter financial report released in August, indicating doubts about its ongoing financial viability. Despite a slight 4% increase in revenue to $877 million compared to the same period last year, the company suffered a net loss of $397 million.

As of the end of June, the company's long-term net debt stands at $2.9 billion, with long-term lease obligations exceeding $13 billion. Japanese conglomerate SoftBank had invested billions of dollars to support this startup from 2017 to 2019, but the company has been continuously operating at a loss, casting doubts on its business model.

Three Reasons Why WeWork Doesn't Work According to Lin Chi Chen

Lin Chi Chen, the founder of Taiwan's startup accelerator AppWorks, shared on Twitter three reasons why WeWork failed, considering it a valuable lesson for startup companies:

"Scaling Too Early" Lin Chi Chen believes that WeWork's financial statements did not show a leveraged business model. Despite a threefold increase in revenue during the high-growth period of 2019, the marginal contribution rate of gross profit minus depreciation only increased by 3-4%, while management costs surged. This led to more losses as the scale increased, making it difficult to increase gross profit. "Thinking at its core, only a very small number of workers have cross-border demand, WeWork's global expansion, merely linearly increasing expenses, cannot bring about leverage improvement in operations."

"Choosing the Wrong Venture Capital Shareholders" Lin Chi Chen believes that due to abundant sources of funding, WeWork, lacking a significant profit model, chose to expand aggressively to hinder the rise of competitors. SoftBank's Vision Fund initially provided strong support, but after a capital increase was blocked by shareholders, WeWork, unable to back down, took the risky move of an IPO, leading to its subsequent failure.

"Invincible Star Syndrome" Lin Chi Chen stated that the negative news of embezzlement and misappropriation of funds that later emerged from WeWork is a kind of invincible star syndrome. It is when entrepreneurs, once successful, begin to act recklessly, and once the tide recedes, they will pay a painful price.