With intensified investor and media criticism ahead of  the IPO of We Company, one of the world’s biggest remote office startups, the coworking model is facing the toughest scrutiny to date.

Can We Company manage to be a sustainable and profitable company in the long haul? Can it survive a recession? And what does the company’s high-profile grilling mean for smaller rivals who are all fighting for investors’ money?

Coworking companies are certainly growing, despite questions about We’s value and massive operating losses. The  flexible workplace market has grown 13% a year for the past decade, according to CBRE research. International Workplace Group may be planning to IPO its U.S. operations, while Knotel and Industrious announced fresh rounds of funding of $400 million and $80 million last month. Convene is expanding to London. 

WeWork’s rivals are looking to compete on affordability and tweak their offerings based on the needs of a target market. They are also trying to figure out how best to manage their real estate holdings, evaluating such things as franchising vs. leasing,the best offering for its target markets and having more solid control of their real estate.

Beyond the immediate IPO goal and increasing pressure from its major investor to hold off on the listing altogether, WeWork’s primary headache is carving out a long-term path to profitability and demonstrating it can survive a  market downturn, should it come.

“WeWork will implode in a recession, they will fail within a year,” Ross Gerber, president and CEO of wealth and investment management firm Gerber Kawasaki, Inc., told Karma.“The companies will move out leaving them on the hook for rent. Plus it’s all small businesses — they will be hit the hardest. There is nothing keeping them in the space.”

Since filing for its IPO on August 14, We has attracted a range of criticisms, including shaky financials and struggles to show a path to long-term profitability, an all-male board, high levels of debts and the questionable practices of CEO and  co-founder Adam Neumann. 

Investors’ eyebrows were raised after learning Neumann reportedly cashed out more than $700 million though a mix of stock sales and loans. They took note of this unusual move ahead of the IPO filing and when the filing arrived, they asked more questions.

Buried in between a high-minded haiku-like mission statement to “elevate the world’s consciousness,” there was also an admission of struggles to meet debt obligations.

“We may not be able to generate sufficient cash to service all of our indebtedness and other obligations and may be forced to take other actions to satisfy our obligations, which may not be successful,” the company’s IPO filing stated. 

WeWork’s inflated vision of itself as the disruptive force that will redefine coworking may be imaginary, but its staggering lease obligations are real and terrifying to investors. 

“As of June 30, 2019, we had future undiscounted minimum lease cost payment obligations under signed operating and finance leases of $47.2 billion,” the August filing read.

“If we are unable to service our obligations under the lease agreements for particular properties, we may be forced to vacate those properties or pay compensatory or consequential damages to the landlord, which could adversely affect our business, reputation and prospects,” it continued.

Earlier this month  Neumann flew to Japan to rally its biggest investor SoftBank Group to invest more cash, according to The Wall Street Journal report. SoftBank asked them to rethink the IPO, the FT reported.

Private talks with investors and public criticism of the company’s vulnerabilities have shaken support for the company, and caused its valuation to be  slashed to “somewhere in the $20 billion range, potentially at the low end,” from a $47 billion private valuation earlier this year, The Wall Street Journal said.

The roadshow, originally scheduled for September, may now be delayed and the IPO might not materialize until 2020. Or it may never happen. Questions swirl around a potential U.S. recessionand what impact it may have on coworking spaces, which rely on freelancers and enterprise clients who are typically among the hardest hit in a downturn.

WeWork’s Woes

Nine years ago, the company then known as WeWork opened its first coworking space in New York’s Soho neighborhood. Since then, it has grown to over half a million members, 40% of them enterprises in 111 cities around the world. 

Earlier this year the company rebranded as We Company, splitting into WeWork, We Grow, and We Live. 

The SEC filing sparked a range of criticism — from the dedication (below) to what it called the need to redefine the “energy of we” and its lofty mission “to elevate world consciousness” to its business model and ability to demonstrate profitability.

Out-Of-Hand Spending and Losses

WeWork’s focus on geographic footprint means it has struggled to keep operational losses in check. 

But it has no plans of slowing down.

“We expect to expand aggressively in our existing cities as well as launch in up to 169 additional cities,” the  IPO filing says. “We have identified our market opportunity to be 280 target cities with an estimated potential member population of approximately 255 million people in aggregate.” 

Personal loans between Neumann and We have further unnerved investors. The IPO underwriters, including JPMorgan and UBS, extended Neumann a $500 million line of credit, and $380 million was outstanding as of July 31.

Then there is their bleak outlook for net income, which doesn’t sound like music to any investor’s ears.

The company reported net losses in 2016, 2017 and 2018 and in the six months ended June 30, 2018 and 2019.

“We do not intend to achieve positive GAAP net income for the foreseeable future,” the company acknowledged in its IPO filing.

Recession Threat

The main concern about the financials and the ultimate test would be a recession, of course.

The only publicly listed coworking space, London-listed IWG, had a hard time during the 2000 downturn. 

 Many investors and WeWork members voice similar concerns about We now.

“In the coming of a recession, I think people will just end up working from home. It will hurt WeWork, I think they are screwed,” says Christian Koch from Company X, in an interview with Karma at WeWork’s original office in New York on Grand Street. “There are better and newer working spaces out there, that are better and more sustainable. It would be stupid to invest in their IPO. There are lots of other better ones springing out.”

WeWork also received criticism about having an all-male board and then added the first female member. Frances Frei, who teaches technology and operations at Harvard Business School, will join the board, the company announced this week. It remains to be seen how much impact one female board member can have on the decision-making process or the company’s bottom line.

What the IPO filing revealed is that WeWork is still figuring out its business model, how fast to grow, how to refine its service offerings and how to compete with rivals.

“Space-as-a-service is an entry point to the category of work,” the IPO filing said.

What Can Rivals Learn?

Increasingly, WeWork’s competitors are looking to differentiate themselves and disrupt WeWork’s aggressive market positioning. 

They’re looking to compete in terms of affordability, spaciousness, and they are going after specific market segments: women, entrepreneurs or focusing on underserved locations in the U.S. and abroad.

“You will see more ‘specialized’ work spaces that will gain press attention for new concepts; for example you might see new coworking spaces focused on media, with podcast studios and camera studios etc — spaces focused on green energy, with radical building and utility system design,” Sam Rounds, data analyst at Triton.ai, told Karma. 

IWG: Diversified Early Mover with U.S. Ambitions

The International Workplace Group, the parent company of Regus, was founded in 1989. IWG is now headquartered in Switzerland, with 3,300 locations across more than 110 countries. Now it may be eyeing a U.S. spinoff company worth 3 billion euros, according to Sky News report. IWG has raised a total of $353.7 million and a post valuation of $4.2 billion.

IWG has been generating revenue and relies on a franchise model, positioning itself as a more stable,diversified coworking alternative. Compared to WeWork, its global ambitions and ongoing international expansion are not an existential threat.

“IWG has many advantages over other players. Our reach is global, enabling us to ramp up and downsize in local markets as conditions change,” the company said in its annual report. IWG cited its multi-brand portfolio, which includes five companies, a “broader customer reach”, more precise segmentation of services and better margins as advantages. 

Growing Number of Niche Competitors

New York City-based unicorn Knotel, has raised $565 million, after a recent funding round of $400 million led by Wafra. Knotel has 200 locations in 11 cities.

Knotel will use the latest funding to boost its Blockchain platform Baya and subscription service Geometry, and is looking to compete with WeWork as a better offering for enterprise clients.

The Wing, which was founded in 2015, has positioned itself as a workspace sharing platform and network for women, and is based in New York City, as well. It has raised a total of $117 million, with $375 million, post valuation.

Launched a decade ago, Convene has raised $286.3 million and is aiming to be the Four Seasons of coworking spaces, less susceptible to economic downturns and the whims of its members than rivals in a lower-end price points. 

Convene’s  biggest and newest location at 530 Fifth Ave., New York City, is a massive space  featuring a Hydra Studios workout studio, bathroom and showers stocked with high-end hair dryers.

Convene’s launch of its New York location shows a maturation of its quality-of-life focused offering.

“We’ve always seen it in our minds and to be at a point now 10 years later to bring it to life, I couldn’t be more excited,” says Ryan Simonetti, CEO and co-founder of Convene.

And Convene is betting that its premium model will be more resilient during a recession.

“If a recession hits, it gives people the ability to either downsize their spaces or increase and make it a more flexible model to help scale businesses. This gives them a more flexible model to scale their businesses however they want to,” Jeremy Joseph, area director of operations at Convene, told Karma. “We are trying to differentiate ourselves by providing a premium model and giving the users more of a breathing space when it comes to pricing.”

Conduit’s location in London. Source: theconduit.com

Others look to redefine what coworking looks and feels like, tailoring to specific needs of its members. In London, The Conduit is an eight-floor building that offers a multipurpose platform for social change entrepreneurs and investors,  including an event space, a restaurant, a lounge, a library and a speakeasy.

STRT, based in Utah, is one of the most recent entrants to the coworking space. It’s aiming to differentiate itself both as a coworking and a coliving space for entrepreneurs and creators. It plans to open its first set of locations this year, after a recent, undisclosed amount of funding this August. 

The race for geographic expansion and global domination is heating up, so is the pressure to show investors sustainable path to profitability.

Industrious, whose investors include Equinox, Canada Pension Plan and the retail unit of Brookfield Property Partners, told Reuters last month it is planning to be profitable “within a few months.” 

Will Recession Be the End of WeWork?

While WeWork’s IPO may still materialize, it’s clear that investor’s hostility to the S-1 filing will add pressure to the company’s expansion and financial stabilization plans in any scenario. If the IPO is shelved, WeWork will lose out on a $6 billion loan from Goldman Sachs and JPMorgan Chase, according to the filing.

Either way, it’s not going to the glorious, ambitious valuation they had hoped for. Outspoken tech critic Scott Galloway, a professor of marketing at NYU’s Stern School of Business, was especially vocal on WeWork’s IPO disclosures. 

Labeling it WeWTF, Galloway said the company’s real valuation was nowhere “near $20 billion.”

Earlier, he called it “an especially risky business going into a recession, when the ability to variabilize costs is limited, but revenue decline is unlimited.”

Still, WeWork is not doomed to fail in a recession, especially as it’s working on diversifying its revenue streams.

“A company like WeWork can last in a recession, its competitor Regus survived the 2008-2009 financial crisis,” says Sam Rounds, at Triton AI. “In a climate where businesses are contracting and cutting staff, temporary and flexible office leases become even more valuable to tenants, which could drive the demand for WeWork workspaces.”

Despite its financial shortcomings and confusing management moves, WeWork has no shortage of cheerleaders.

“I don’t know how they can be so cheap and provide so much free stuff with that IPO filing that they’ve put out — how are you still able to do that?” says Craig Cook, CEO of MobilAds, an advertising company that uses ridesharing fleets as moving billboards, which has been based at WeWork in New York for a year. “We are able to collaborate a lot with different companies, though it gets crowded.”

Karma’s Keshav Pandya contributed reporting to this piece.