Why WeWork, Burning Cash Fast, Faces Looming Financial Crisis

WeWork, the high-profile shared workspace company whose IPO has been delayed and who's CEO has been sacked, is spending money at such a rapid pace that it may only have enough cash to last until next spring. The company's sharp decline, marked by its shunning by many potential major investors, could also spell trouble for its eventual IPO with regard to demand and pricing. Although it had $2.5 billion in cash as of June 30, WeWork is poised to run out of money by mid-2020, per a detailed report by Bloomberg. For that reason, it's crucial that the company find new sources of cash quickly if it is to remain viable.

What This Means for Investors

WeWork is one of the biggest IPO-related debacles in many years. Following on the heels of IPOs for Uber Technologies, Inc. (UBER) and Lyft, Inc. (LYFT), both of which went public and saw their stocks plummet, WeWork has taken a slightly different approach. This company, which is also beset by losses, has delayed its IPO and may not even make it to that stage. Per Bloomberg, WeWork's new co-CEOs, Sebastian Gunningham and Artie Minson, must quickly secure substantial funding in the form of bank loans and private investments. The company must also stymie its spending, having lost $690 million in the first six months; analysts expect cuts to thousands of jobs. This also means that WeWork will have to fundamentally change its approach from one of growth-at-all-costs to a more prudent, profit-minded strategy.

Changing Business Model

WeWork has received criticism for its aggressive model, in which the company has raised more than $12 billion to rent out office space which it furbishes and leases to companies. While WeWork has $4 billion of incoming rent payments from tenants averaging lease lengths of 15 months, WeWork will owe $47 billion in future rent payments over leases spanning an average of 15 years.

The massive imbalance in WeWork's model revealed itself when the company submitted IPO filings, per the The Wall Street Journal. Between 2016 and 2018, the beleaguered company quadrupled its revenue to $1.82 billion while simultaneously seeing annual losses climb to $1.61 billion. The company eventually cut its valuation, but that failed to prompt new investor interest, per another report by the Journal.

What's Next

Earlier in the year, WeWork committed to a $6 billion credit facility, although that is contingent upon its raising $3 billion of equity. With a falling valuation, the company would need to issue more and more shares to reach $3 billion in equity. At this point, with the company spending at a frenzied pace and major questions about an IPO still looming, WeWork is in need of a massive shift in direction.

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