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WeWork's CAC Didn't Have To Be So Big

The one thing WeWork could have done differently years ago (and what it could still do differently now)

· Regus,WeWork,Competition

At 1:13 p.m. on July 5, 2017, I sent WeWork co-founder Miguel McKelvey an email to propose a deal that would lower WeWork's cost to acquire a customer (CAC).The substance of the deal was simple:

A funny thing happens to your CAC when you know exactly when a prospect needs to buy exactly what you sell, and they are not stuck in a contract when they enter your pipeline: your CAC shrinks. Under my proposed deal, WeWork could have, for the very first time, begun to acquire customers profitably, at scale, by out-maneuvering its biggest rival directly.

Several days later, Miguel replied to my email. In his reply, Miguel asked me to expound on my proposal so that we could "pitch" it to the right people at WeWork.

I obliged, replying to Miguel to explain that Veeto was "the largest single conduit through which current Regus customers switch to other co-working space providers[,]" and that we could, thus, provide WeWork with a steady stream of highly targeted prospects at the very moment those prospects were defecting from Regus--and looking to immediately sign up for a new office.

Implicitly, because Regus was (and still is) WeWork's largest competitor, this deal meant that WeWork could acquire lots of customers at the cost of only the referral fee WeWork would pay to Veeto (which we proposed to be 10% of the annualized revenue for the first year, and which, by the way, we actually proposed splitting with the customer). All of those crazy, expensive, and unprofitable incentives--those would go away, and ex-Regus customers and WeWork would both get what they want. This should have been a no-brainer for WeWork.

...and from the outside looking in, it appeared to me that Miguel recognized this.

At 2:57 a.m. on August 1, 2017, Jillian Ricciardi, Miguel's executive assistant, sent me an email introduction to Derek Feinman, VP of enterprise sales development at WeWork. I replied to thank Jillian for the intro and to greet Derek. Derek, however, did not reply. So I replied to the thread again, and again, a total of six times between August 1, 2017 and February 12, 2018, ccing either Miguel or Jillian on five of those replies. Despite one of WeWork's two co-founders basically asking Derek to evaluate the deal I had proposed, Derek seemed to be too busy to do so. But what was Derek busy doing instead?

I never figured out how Derek spent his time in Q4 2017 for sure. But I did learn that Derek seemed to spend at least some of his time in Q4 of each year rehearsing a rap song for his annual stage performance at a WeWork event. When I later viewed the videos of the 2017 and 2018 performances, Derek's lyrics in that song--namely, at the 1:37 mark in his 2017 performance and the 2:32 mark in his 2018 performance--gave me a clue as to why he had been blowing off Miguel's directive: the lyrics suggested that Derek did not consider Regus to be very important as a WeWork competitor, much less as a potential source of new customers.

On February 12, 2018, I emailed Miguel to let him know that Derek had not yet replied to Jillian's introduction email. About three hours later, Derek finally replied to the thread, saying only: "Hope all is well. We are currently not interested in the product. Thanks again for following up."

Of course, since Derek and I had never spoken or exchanged a single email until that moment, there was no way for Derek to have known what exactly his reply was disclaiming WeWork's interest in. So, just for fun, I replied to Derek two minutes later saying only: "What product?" But Derek did not reply.

It was a strange experience to have essentially been told "tell me more" by one of WeWork's c-suite/co-founders only to then have been told "not interested" by one of WeWork's VPs. At a minimum, it revealed an unusual org-chart power dynamic. I thought about this for a few days, and then, while reading this David Gelles piece, I had an idea.

The Gelles piece highlighted all of the big-ticket questions about WeWork, all of which, I will note, have basically persisted to this day.

1. Was WeWork distracted from its core business?

"Already the company has started WeLive, its residential offering, and Rise, its gym. It acquired Meetup, the social network that facilitates in-person gatherings, and the Flatiron School, a coding academy. Still to come: WeGrow, the company’s for-profit elementary school, set to open in September. WeWork has even invested in plans to create giant wave pools for inland surfing.
 

A company ostensibly about co-working now employs yoga instructors, architects, teachers, environmental scientists, software engineers, molecular biologists and social psychologists."

2. Was WeWork CEO and co-founder Adam Neumann listening to advisors?

"Is it all a bit much for a young company still trying to build out its core business? “I’ve made that argument,” said Bruce Dunlevie, a WeWork board member and partner at the venture capital firm Benchmark. But, he said, “great entrepreneurs like Adam don’t listen to guys like me.”"

3. Was WeWork's valuation justifiable in direct comparison with its largest competitor IWG (a.k.a. Regus)--or even in isolation?

"As WeWork expands in all directions, it faces persistent questions about its rich valuation and the durability of its business model. Critics argue that the company does little more than corporate real estate arbitrage — leasing a space, spiffing it up, then subleasing it out to other tenants. The company owns hardly any properties, giving it precious few hard assets. Its growth projections strike many as unattainable, and it has missed expectations before. A number of upstarts loom as potential competitors, seeking to replicate WeWork’s success. And many WeWork tenants are unproven start-ups that could quickly fold.

 

IWG, a publicly traded co-working company that has more members and more real estate than WeWork, is valued at just $2 billion. Yet Mr. Neumann has convinced investors that WeWork is worth 10 times that figure.

 

“Adam’s explanation for the valuation of WeWork speaks for itself,” said Chris Kelly, co-founder and president of Convene, a company that offers flexible event spaces and is backed by major real estate firms. “This is not an Excel spreadsheet calculation. He believes there’s an energy behind the brand, and he’s gotten people to invest at that valuation. He has not tried to explain it in traditional financial terms.”


Indeed, to assess WeWork by conventional metrics is to miss the point, according to Mr. Neumann. WeWork isn’t really a real estate company. It’s a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs. And Mr. Neumann, with his combination of inspiration and chutzpah, wants to transform not just the way we work and live, but the very world we live in.""

My idea was that WeWork's investors might be more amenable to my nuts-and-bolts proposal than WeWork's apparent spokesman, Derek, had been. Acquire more customers, at a lower cost, faster, and thereby stop the loss per customer​ WeWork was depending on venture capital to subsidize (which, today, according to WeWork's IPO filing, is about $5,200 per customer). So I decided to ask one of WeWork's investors/board members.

At 1:18 p.m. on February 26, 2019, I sent the following email to Bruce Dunlevie, with the subject WeWork won't listen to me either:

bruce dunlevie wework email

Bruce never replied. But I know he read the email. How do I know?

There were six hyperlinks included in the email: the five you see in the screenshot above, plus one in the signature of the email, which is not shown. Because the email was sent from my CRM, with default click-tracking, I could see that Bruce had clicked the second, fourth, and sixth hyperlink. The second and sixth hyperlink led to information on my company, while the fourth led to Derek's rap song conveying his apathy for Regus.

It is hard to know for sure whether Bruce adjudged my proposal to be worth WeWork's actual consideration, or whether, instead, he just cringed at how Derek's indifference to it might have been a decent microcosm of WeWork's business decisions more broadly--not necessarily because my proposal was so good, but because so many of the other things WeWork was spending its time on were so not good, because, as the Gelles piece documented, many WeWork stakeholders and commentators wondered how those not good things would contribute anything positive to WeWork's fundamental unit economics.

The very next day, Derek emailed me: "I am back from paternity leave. Do you have time on Monday afternoon to walk me through the Veeto product and how it may benefit WeWork?" (Oh my, I wonder what prompted Derek's sudden resurgence of interest in my proposal.)

I replied to Derek, and the following week, we spoke by phone. I explained my proposal. Derek listened, and then he responded to it. He said that his biggest objection to it was that WeWork was, at that time, focused on acquiring more "enterprise customers" and fewer "little guy" (my quote, not Derek's) small businesses, freelancers, and professional service providers (such as attorneys and accountants). That was actually a legitimate objection, because "little guy" was largely the profile of a typical defecting Regus customer. However, Derek did not offer any arguments as to why WeWork's focus on acquiring enterprise customers had to be mutually exclusive with signing up ex-Regus customers that were not in that enterprise segment. But realizing that Derek was likely only taking my call because Bruce had, in some way, compelled him to do so, I did not delude myself into thinking that Derek was ready for that rebuttal and to actually consider the merits of my proposal. He had his marching orders, and, by this point in WeWork's life-cycle, Derek was likely accustomed to the insulating properties of venture capital, insofar as the subsidy of venture capital sometimes makes what is not sustainable appear to be sustainable. So I thanked him for his feedback and ended the call.

After the call with Derek, I persisted for four more months pitching my proposal to WeWork. By the time I finally shelved my proposal in July 2018, I had emailed and/or spoken to at least ten more people about this. At one point, I even tried to bypass the proposal-evaluation step by just offering to immediately refer several ex-Regus Veeto customers to specific WeWork locations--and I corresponded directly with the WeWork employees at the local level to get it done. I figured that, as an alternative to going top-down, this could be a straightforward way to test the unit economics, which would give me data to then take back to the higher-ups. Even at the local level, though, no one at WeWork cared.

Altogether, my campaign for this proposal touched people holding the following titles at WeWork:

  • Co-founder
  • Executive assistant to co-founder
  • VP of enterprise sales development
  • Board member
  • Growth partnerships manager
  • VP and global head of broker & real estate partnerships
  • Global head of growth partnerships
  • Head of special growth projects
  • Associate of broker and real estate partnerships
  • Senior associate of broker relations
  • And various other WeWork employees at the local level (when we tried to hand-deliver prospects without top-down permission)
I list this out because I think that one non-obvious point we can draw from my account is unusual in that it does not seek to solely blame CEO Adam Neumann for all of WeWork's woes. When you don't understand what it takes to build a business from the ground up--as most people do not--it's easy to oversimplify your reaction to a business's missteps by impulsively blaming the CEO. At no point in my 12-month campaign did I ever speak with Adam. I spoke to Adam's co-founder, and then I spoke with a long list of other, smart, capable people at various ranks on the org chart. I'm going to assume that each of these people had the autonomy to think for him- or herself, and I'm going to further assume that the WeWork culture was not so oppressive that it would have somehow prevented any one of these smart, capable people from speaking up if it had occurred to him/her that what I was proposing might have made just a little bit of sense (same goes for Bruce, who, although, admittedly, is in a slightly different place sitting only on the board, could have sent my proposal to Adam, or, really, anyone else who was not too busy rehearsing rap music).

Yes, CEOs are always culpable. But so is any employee who failed to make good decisions in his/her own role. The more responsibility you have as an employee to make decisions on which the business must trust and rely, the more culpability you have when things fall apart. This is why Adam Neumann stepping down as CEO will not necessarily save WeWork's business--the people who still work there have to make that happen.

Looking back, it's certainly possible I overestimated the prudence of my proposal for WeWork, and that explains why no one was receptive to it even after a year of me pitching it; I suppose it's possible that all of those smart, capable people were right in declining it. But WeWork's big CAC problem today suggests otherwise.

Since 2016, WeWork's CAC has gotten bigger, not smaller, over time. I think this is symptomatic of WeWork's systemic refusal to even care about its fundamental unit economics, much less improve them. Even if declining my proposal was the right move, for whatever reason, it would be hard to argue today that eschewing "little guy" prospects more generally (such ex-Regus customers) was the right move.

Here's why I say that. WeWork has more enterprise customers today than it did when I spoke to Derek in March 2018--a reported 40% of its customer being "enterprise" today versus about 20%-25% when I spoke to Derek--and yet, that increase has still not been enough. In fact, in WeWork's recent disclosures, there appears to be a correlation between an increase in enterprise customers and an increase in CAC--although it's hard to know the extent to which the two metrics are actually related, given WeWork's insistent opacity and strange presentation of what little bit it does disclose. But even on the outside looking in, you can point to the fact that Regus actually turns a profit with "little guy" customers, with virtually the same business model (what WeWork's business model seems to simply be, despite contrary claims about technology, consciousness, energy, and so forth) which begs the question: why would WeWork not have been able to so far, and still able to now, similarly profit?

Here's the good news, though: it might not be too late. We're still over here getting disgruntled Regus customers out of contracts (and doing so profitably I might add). Thus, in a sense, the opportunity is still there.

Shall I send Bruce another email?

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