Published on 9 Apr 2020

Don’t blame coronavirus for WeWork’s collapse, blame WeWork

 The most hyped startup in the world is hanging by a thread. But WeWork’s blitzscaling strategy was always going to end in tears 

With a final whimper, the dream of restoring WeWork to its former glory has finally gone. On April 1, Japanese conglomerate and major shareholder SoftBank decided not to buy $3 billion (£2.45bn) in WeWork stock, dealing a blow to shareholders, including Adam Neumann, the company’s co-founder and former chief executive, who had hoped to sell their stock. Rather than rescue it, WeWork’s knight in shining armour is swiftly riding off into the night.

It’s a bitter development in an already acrimonious rescue plan, which involved SoftBank reluctantly pouring billions of dollars into the company to salvage its broken reputation and eventually recover its initial investment. Even if the market was prepared to forgive WeWork’s blunders, a blistering shut-down caused by coronavirus has left WeWork with empty buildings, tenants that can’t pay and astronomical costs. According to a report by the New York Times, the WeWork board is now considering whether to sue SoftBank. Without SoftBank, there seems to be no way forward for WeWork, which desperately needs an influx of cash to survive this crisis and weather a US government investigation.

Say something a thousand times and you will eventually believe it’s true. Academics call it “the illusory truth effect”. Shrewd politicians and marketing experts exploit it all the time. Lately, it’s become a method of choice for startups too, although with less success.

At the end of summer 2019, WeWork was the most hyped startup in the world. Valued at an eye-watering $47bn, the co-working company was supposed to go public in one of the most anticipated initial public offerings (IPO) of the year. Fast forward 45 days and the company imploded, burning $40bn in the process. The culprit? The illusory truth effect.


The WeWork debacle is one of the most catastrophic business fiascos in recent memory. It’s also a cautionary tale for the many startups struggling to justify their stellar worth – amassed in the name of their alleged technological prowess – and failing to live up to their hype. WeWork mastered that art. It used this mantra for years: “We’re not a real estate company, we’re a tech company.” Sadly, they weren’t.

WeWork’s co-founders, Neumann and Miguel McKelvey opened the first WeWork in New York in 2010. They leased a building from a landlord, sliced up the space, fit it out with nice furniture and sub-let it to startups and young professionals.

WeWork did not invent this concept. In the UK, co-working spaces, serviced offices or flexible offices have existed for at least three decades, going through a series of booms and busts. But Neumann and McKelvey pumped heavily on the amenities, provided free Internet and barista coffee, unlimited beer and prosecco tabs. Over the first five years of its existence, WeWork had been a nice success story. It opened a few locations in New York and expanded in London.

Enter Masayoshi Son, founder of Japanese conglomerate SoftBank. In 2017, SoftBank committed an initial $3bn into WeWork, making its valuation inflate to a staggering $20bn. At that point, WeWork was already one of the top five most valuable startups in the US. SoftBank continued flushing the company with cash – an additional $3bn in November 2018, followed by another $2bn at the beginning of 2019. It’s a tactic that in Silicon Valley circles is known as “blitzscaling”: making a company so huge so quickly that it won’t have any competitors in its sector. In January 2019, SoftBank declared that WeWork was worth $47bn. WeWork believed them – after all, they’d been telling this story for years.

WeWork had always used technology as an excuse to inflate its value beyond the borders of a classic real estate company. WeWork’s main competitor, IWG (Regus), a fellow serviced office operator that has existed since the late 1980s, has six times WeWork’s locations, generates $1bn a year more than WeWork in revenues and, most importantly, it’s profitable. Yet, it is only valued at $3.7bn; it appears that it hasn’t mastered the illusory truth effect.


In January 2019, WeWork had grown so much that it was the largest office occupier in both New York and London. It was ready to go public, and filed paperwork for its much anticipated IPO. That’s when the cracks started to appear. They had always been there, but they truly spidered all over the place once the company published its IPO prospectus.

The word “technology” appears 97 times in WeWork’s prospectus. The company claimed its “mission” was to “elevate the world’s consciousness” and “change how people work, live and grow”. All this, WeWork said, was “connected by our extensive technology infrastructure”.

Look for that tech, however, and you won’t find any. Sure, WeWork has an app that its members can use to book services and connect to each other – but so has Regus and many other companies. WeWork claims it monitors the way its members are using its space and that it designs and tweaks its buildings accordingly – but then again, that’s something that many developers and landlords do these days.

It soon became evident that Wall Street investors were immune to this particular use of the illusory truth effect. Merely repeating the word “tech” wasn’t enough and people were more intrigued by other, more controversial aspects of the business, such as WeWork’s leasing model.

That was WeWork’s biggest flaw – and the main reason why it wasn’t profitable. The company was leasing huge buildings long-term (for ten, 15, even 20 years) but subletting the space to “members” that could walk away with as little as a month’s notice. WeWork agreed such long leases with landlords so they could take just as long free-rent periods in exchange (12, 20 and even 36 months). Over those initial two and a half years or so, WeWork was cashing in from members without paying any rent. Meanwhile, in order to keep the whole thing running, it needed to open more and more centres.


When the free periods expired, the company started bleeding money. The IPO filings revealed that it was losing $2 for each dollar it generated in revenues. In 2018, it had burned $1.9bn against $1.8nm of sales. Eventually, WeWork collapsed under all its weight.

By mid-September investors suggested that the company cut the valuation by more than half, to $20bn, then down to $8bn. After announcing that it was cancelling the IPO, at the end of September, the company almost ran out of cash. It couldn’t even pay for the severance costs of the thousands of employees it laid off. SoftBank had to pick up the tab, injecting another £9bn into the company to keep it afloat.

Son publicly apologised in haiku-esque fashion: he said that he made serious errors in judgement that led SoftBank to post earnings “of the deepest red”. But he also added that “the vision remains the same.” Again, an illusory truth.

Because the consequences of the WeWork disaster might be more than just a bump in the road for SoftBank. A second Vision Fund failed to materialise and the company’s grandiose 300-year plan now looks less credible too. Investors are already rumouring of a “SoftBank’s curse”.

As part of its rescue, SoftBank accelerated a $1.5bn equity investment into WeWork last year and has said that it stands behind another $4bn of debt financing. But this latest development proves that it has thrown good money after bad.


The coming months will be the crucial test for WeWork’s survival — and whether it can hold on until after the coronavirus crisis is doubtful. Before the pandemic, many people thought that either WeWork will scale down massively, consolidating into a $3-to-$5bn property company, or it will face bankruptcy. Without the SoftBank intervention, it could become one of the biggest casualties of this economic turmoil.

Strip out all the hype and the technology mantras and WeWork had always been just that: a flexible office company that offered nice spaces. Still, it will probably go down in history books as the most illustrious victim of the illusory truth effect.