WeWork’s going concern warning is a reminder that VC and low-margin business don’t mix

There’s no point in being rude to WeWork at this juncture. The company’s market cap has fallen to around $130 million, it has billions of dollars in debt, and it said recently that it may struggle to stay in business as its cash balance dwindles. WeWork sees several avenues to right the ship before it runs out of cash: reduce rent and tenancy costs, limit user churn, reduce its overall cost basis and raise new capital.

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It is not clear how much relief those endeavors will bring, but WeWork is certainly not going out without a fight. Its debt restructuring effort earlier this year is more evidence of that intent.

As we enter what could be the last few months of WeWork, we can draw several lessons from its Icarus-esque rise and fall. You could argue that WeWork is a warning against granting founders too much control for too long: its founder was famed for his ability to sell and raise capital, but lax controls failed to prevent delusion from replacing ambition at the company. You could also make the case that WeWork became too complicated a financial entity for its own good.

But here’s the lesson I want to take away from WeWork’s saga: venture capital can be excellent for quickly scaling technology startups, but the model is not a good fit for lower-margin businesses.

Costs, losses, weights

In its most recent quarter, WeWork reported revenue of $844 million, up 3.6% from a year ago. The company improved its bottom line too, narrowing its net loss to $397 million from $635 million, and shrinking adjusted EBITDA losses to $36 million from $134 million.

Those figures, however, did nothing to offset the fact that the company still had a free cash flow deficit of $646 million in H1 2023. That kind of cash burn is a tough obstacle to overcome for a company that’s worth less than a quarter of its free cash flow deficit from just the first two quarters of the year.