By now, you already know that WeWork has devolved into an unmitigated disaster. But on the off chance that you didn’t, let’s quickly recap: Last week, the much-hyped startup — which specializes in renting out shared office spaces for the “gig economy” – pulled its equally hyped filing for its initial public offering. Additionally, WeWork co-founder and CEO Adam Neumann announced that he would step down from the top post.
In recent memory, I can’t recall an organization having a worst single-week period than WeWork. While everybody in the media is harping on the WeWork mess, I give a lot of credit to InvestorPlace contributor Dana Blankenhorn. With the embattled company delaying its now-abandoned IPO, Blankenhorn presciently proposed its failure before the axe came down.
Moreover, Blankenhorn hit hard at the public-offering mania that we’ve been witnessing. He wrote:
So far in 2019 there have been 94 IPOs, and 38 of them have shown negative returns.
The big winners, like CrowdStrike Holdings (NASDAQ:CRWD), Beyond Meat (NASDAQ:BYND) and Zoom Video Telecommunications (NASDAQ:ZM), have generally come to the market prepared to make a profit. There have also been big medical winners with market caps near $1 billion, like ShockWave Medical (NASDAQ:SWAV) and Turning Point Therapeutics (NASDAQ:TPTX). Most IPOs are still hits — but the batting average is declining like an aging slugger’s.
Unlike other stories about the WeWork mess, I’m not going to harp on the obvious. Rather, I’m going to focus on the warning signs to help prevent investors from making a similar mistake.
WeWork IPO Should Have “WeMathed” First
Before we dissect what went wrong with WeWork, we should appreciate why the company initially attracted investors. As an office-leasing specialist, WeWork naturally offered serious potential.
According to Forbes’ contributor TJ McCue, 57 million workers are part of the gig economy. In colloquial terms, this is called a “side hustle.” Under official categorizations, they’re 1099 contractors as opposed to W2 employees.
In other words, gig workers are their own small businesses. And businesses typically need office spaces.
Except that they don’t in all cases. The 57 million side hustlers equate to 36% of all U.S. workers, which is a significant allocation. However, a quarter of full-time workers (W2 taxpayers) work a side hustle. This is significant because these folks probably don’t need an office space. They’re more likely electing a flexible opportunity, such as driving for Uber or Lyft.
Thus, WeWork automatically loses a sizable chunk of that 57 million worker pie.
Next, you must consider what kind of work is best-suited for renting office space. According to the Bureau of Labor Statistics, what it calls contingent workers operate in the following fields: business services (20.6%), construction (17.2%), education and health (14.2%), finance (8.3%), other services (7.8%), retail (6.6%), manufacturing (5.9%), hospitality (5.8%), transportation (5.3%), information (2.1%), public administration (2.0%), wholesale trade (2.0%), agriculture (1.8%), and mining (0.3%).
Frankly, most of these categories don’t require office space. Can you imagine miners and agriculturalists bringing in their shovels to a conference room? It’s ludicrous.
Where I see legitimate demand is from business services, finance, other services and maybe retail. But even if we were to assume all these category contractors needed office space, that amounts to a little over 43%. Thus, the maximum ceiling for WeWork is not 57 million workers, but 32.5 million.
WeWork Is the Ultimate Marketing Con Job
Good businesses feature strong servings of both needs and wants. Stated differently, successful companies address a problem, and they address it better than the competition.
In WeWork’s case, they’re addressing a problem that’s already been addressed ages ago, and it’s questionable that they do it better than everyone else. In my opinion, this company is the ultimate marketing con job.
Because even if we assume, for instance, that all business services contractors wanted an office space, do they actually need it? I’d argue no. For instance, I write for multiple client companies. Not a single one of them care where I do my work, so long as I do it.
Indeed, I can write this piece that you’re reading from my home or on the dark side of the moon. As long as I have access to an internet connection, it truly doesn’t matter.
Therefore, that 32.5 million max cap is realistically much fewer. And if we hit a recession, more contractors would be incentivized to cut costs. An unnecessary office space would be the first expense to go.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.