WeWork’s IPO debacle highlights the failures of modern brand building

Masquerading as a tech firm has done no favours for WeWork, neither have its premature brand extensions and over-inflated view of its own self-importance.

WeWorkIt’s a terrible thing to be prescient. Ask Scott Galloway. Many months ago the always opinionated, usually accurate, professor made the bold prediction that tech darling WeWork would never make it to its much vaunted IPO and its ambitious valuation of $47bn (around £38bn, giving it roughly the same value as Tesco and Whitbread).

Famously, he christened the company the “most over-valued company in the world”. It’s not the bold tenor of that comment or its ass-crunching indifference that should grab you. It’s the fact that Galloway uttered it in 2017 when most experts were still falling in love with WeWork. The “most innovative company in the world” according to Fast Company.

Galloway’s call has proven correct. This week, WeWork postponed its IPO and announced its inspirational founder and CEO Adam Neumann would be stepping down. Dreams of a $47bn valuation have crumbled to maybe $1bn or $2bn. Possibly nothing.

The Galloway prediction and a recent eviscerating article in Medium under the pen name ‘Henry Hawkesberry’ are highlights in what is quickly becoming the biggest flotation debacle in recent investment history. Better finance and strategy experts can explain to you where WeWork has gone wrong and why it has been such an over-rated business. But allow me to examine a few of the larger themes of modern brand building that WeWork nicely and extravagantly illustrates.

Profit still counts

It’s become trendy in recent years to poo-poo the idea that generating a significant profit is an important business and marketing fundamental.

Marketers in particular are guilty of looking at the quality of a company’s product or service, the value in its pricing and the general bullshit that surrounds its current operations in the media as the three main signals of an organisation’s success.

But they consistently fail to look at whether that company is actually making any money. Which is, you know, important. Uber is a classic example of an amazing service, that offers incredible value to the consumer and one that is constantly touted as a disruptor.

All true. But it also lost $3bn last year. That says a lot. So does the fact it has no long-term plan to ever make any money. That’s not my judgement, that’s the admission of Uber’s senior team who cautioned earlier this year that costs were only likely to increase in the foreseeable future and that it may not achieve profitability.

Another warning sign that WeWork neatly illustrates is the sudden and continual desire to diversify brands.

The good news for Uber is it looks like deal of the century compared to WeWork. For the six months to June 2019, WeWork generated $1.5bn in revenues. Smashing news until you add that it also lost $900m over the same period.

Imagine if you opened a store that took in a thousand quid a day but was losing about five hundred quid a day nonetheless. Nevermind an IPO you’d be looking for an SOS.

Yes, it’s an over-simplistic example, but it’s a lot more helpful than the bullshit that has followed WeWork thus far and portrayed the company as somehow a winning proposition. As the company increases its revenues, its losses increase in lock step. Want to know why? Because the business sucks.

When a company is losing money, there is something wrong with it.

Debt sucks

So how does a company losing about $200,000 every hour present itself as not only tenable but valuable to investors? The answer is debt.

Like many modern businesses, WeWork has been looking to raise huge amounts of debt to fund its loss-making operations and signal to investors it has the confidence of the market. Sources close to the company suggest the organisations was looking to raise between $3bn and $4bn in debt to tide it over.

WeWork is not alone. Another much-missed statistic is the degree of debt Netflix is accruing in order to stay on top of the streaming wars.

WeWork-PaddingtonNetflix will spend an eye-watering $15bn on content this year but its subscription fees will simply not cover this kind of outlay, so the company issued more junk bonds earlier this year. It is now estimated to owe around $12bn and is yet to pay back a dollar. Netflix generated a net income of just over $1bn last year: at that rate the company will need more than a decade of those profits to repay its debt obligations.

Except that will not happen. For starters, Netflix has to keep spending billions to produce new content and cannot redirect its profits to its debt. For seconds, Netflix is about to experience the most competitive category in the history of capitalism in the advent of the streaming wars. The likes of Disney, Amazon and Apple are all coming and competing for eyeballs. Things are only going to get more expensive for Netflix and the debt will, I bet, be its downfall.

The streaming wars will be the bloodiest battle in marketing history

Everything tech is rarely tech

One of the crucial success factors in WeWork’s rise to fame is the vague, socially-constructed idea that this is another big disruptive tech firm with another massive IPO.

The company fanned the flames of these tech connotations by borrowing from tech firms like Salesforce, which calls its offer ‘software-as-a-service’, and referring to its office rental business as ‘space-as-a-service’. WeWork also made much of its app, which enables members to book rooms and pushes heavily its “community technology”.

The reason for this kind of tangential connection to tech should be obvious: the multiple that comes with it. Salesforce, that most genuinely tech of tech firms, enjoys a multiple of 10x revenues, meaning its $130bn company value is approximately 10 times its sales for the year. Contrast that with boring old office landlord companies like IWG, which trades at 1.25x revenues and you can see the attraction of allusions to tech for WeWork.

Every business needs to position itself as tech to enjoy the perceptual fruits that are bestowed as a result. Take Tesla, which when all is said and done is a battery manufacturer. The more it can promote itself as tech, the more rope its investors are prepared to provide it. Tesla is another company that usually makes a loss and owes billions in debt. Is there a pattern emerging?

Premature extension issues

Another warning sign that WeWork neatly illustrates is the sudden and continual desire to diversify brands.

Standard corporate strategy and brand architecture theory both point to focus and doing less as being at the core of company success. No surprise then that WeWork has been doing just the opposite. Despite massive losses the company created a holding company called We Company and started a series of highly questionable brand extensions.

Guess which business the We Company expanded into? Was it an elementary school system called WeGrow, a boutique hotel company called WeSleep, financial services using the WeBank brand or a yacht charter business called WeSail?

That’s right, you guessed it, all of them. Despite losing billions in its core business the founders decided that what its company needed was more debt, distraction and financial losses. Beware any company that is intent on ego-driven extensions before the core business has even turned a profit.

Brand extensions do bring cool new products and new revenues. But they also suck up enormous corporate resources and rarely turn an immediate profit.

Brand purpose is often a smoke screen

Finally, beware any company that sounds like author Simon Sinek. Chances are they are using brand purpose as a deliberate smoke screen for all kinds of other unmentionable corporate practices.

In WeWork’s case there were astonishing levels of purpose wank splattered across every element of the company’s activities. “Our mission is to elevate the world’s consciousness,” WeWork wrote in its initial IPO.

“Philosophically, we believe in bringing comfort and happiness to the workplace,” it went on. It wanted to “re-invent work” and saw employees as “mission-driven individuals inspired by the opportunity to connect and empower others”.

WeWork’s mission had nothing to do with office space or even work. Instead the company claimed its mission was to “elevate the world’s consciousness” and promote the ideal that “living a conscious life means choosing to live proactively and with purpose”.

Wanky wanky wank wank. You are an office rental business. Get over it.

WeWork and its failed IPO will probably come to represent something of a low water mark for the bizarre business decade we have all had to live through. Expect a major re-assessment of the value of many of the once-beloved disruptive businesses like Uber and Netflix and Lyft in the next few months.

In WeWork’s case there were astonishing levels of purpose wank splattered across every element of the company’s activities.

Get ready for a growing scepticism around the role of ‘tech’ firms and their alleged performance. And prepare for a major re-evaluation of brand purpose and the associated wank that goes with it.

Sniff the air. That’s a downturn you can smell. And it is coming our way. The fatuous, nonsensical garbage that has passed for good business strategy is about to get found out and rejected. WeWork is our Enron. Not just because of its relative fame and sudden fall. But because it represents the moment when the market and everyone collectively within it realised that the game was up and very much about to change.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Mathieu Manson 27 Sep 2019

    Fantastic article Mark! This quote is particularly epic:
    “Beware any company that sounds like author Simon Sinek. Chances are they are using brand purpose as a deliberate smoke screen for all kinds of other unmentionable corporate practices.”

    And this thought is at the same time sobering, worrying and refreshing:
    “WeWork and its failed IPO will probably come to represent something of a low water mark for the bizarre business decade we have all had to live through. Expect a major re-assessment of the value of many of the once-beloved disruptive businesses like Uber and Netflix and Lyft in the next few months.”

  2. Marcelo Salup 29 Sep 2019

    The article is totally right. The headline thesis is totally wrong. WeWork, Uber… they are not “failures in modern brand building”. These companies did build a brand. Get over it.

    Their valuation is what is being discussed and that, honestly, is a failure in modern due diligence. A lot of people (me included) have sounded the bell of “not only are they not making profits… they are never going to make a profit” but 99.9% of us are too small to be taken seriously by the poobahs of modern investment.

    The failure is not even by the CEOs of these companies! They did their job: created a brand, got money for their investors (themselves). That is true capitalism.

    The huge failure is only by modern investors. They failed. Then again, it’s only money.

    • David Vawter 30 Sep 2019

      I’d say Professor Ritson has it pretty much dead to rights. Can a brand be considered successful if it can’t be leveraged to get a consumer to pay more than the cost of the goods or service being offered? Anyone can give something away, especially if you have an unlimited supply of other people’s money subsidizing you. That’s more akin to designer socialism than it is capitalism. The capitalism part will come in when the private equity taps get shut off.

    • Heather Johnston 1 Oct 2019

      On that basis, Bernie Madoff created a successful brand, I hope you don’t mean. There is a difference between branding, which represents the additional value you as a buyer receive from that particular seller in that market, and fraud, which is perilously close to where a lot of soi-disant ‘tech’ companies are. If you make out you are bigger and better than you are, for the purpose of raising money from other people which you do not intend to repay, that’s fraud. I, too, think Netflix is heading towards the dustbin of history, and quite a few of the ‘fraud-as-a-service’ outfits will follow. Let’s bear in mind that unicorns are actually a myth.

  3. Richard Fullerton 1 Oct 2019

    Bang on. Read a long broadsheet article about WeWork recently and came away thinking it should be called WeWank, but Mark Ritson beat me to it.

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