Firing Adam Neumann doesn’t solve WeWork’s biggest problem: The underlying business stinks

• WeWork CEO Adam Neumann announced Tuesday he’s stepping down as the company’s CEO.
• The decision comes a week after the company decided to postpone its initial public offering and follows criticism about a series of eyebrow-raising transactions by Neumann involving the company and reports of his irresponsible or questionable behavior.
• Removing Neumann could be a positive change for the company, but it doesn’t solve WeWork’s basic business problems.
• WeWork is in real estate but has been acting and spending as if it’s a tech company, which is leading to both an urgent cash crunch and a chronic mismatch between revenue and expenses.
• This piece has been updated to reflect Neumann’s resignation as CEO.
• Read all of Business Insider’s WeWork coverage here.

Adam Neumann does not seem like the kind of person you’d want running a public company — or maybe any company at all.

But anyone who thinks his decision Tuesday to step down as WeWork’s CEO will solve all the company’s problems and get its initial public offering back on track is seriously deluding him or herself.

The commercial real-estate giant’s fundamental problem is not that it had an entitled, hard partying, apparently self-dealing egomaniac as its head. Its core trouble is that it has a business model that just doesn’t work.

By itself, replacing Neumann as CEO with two of his underlings — as WeWork just did — won’t stop WeWork from losing about $1 for every $1 it gets in revenue. Even if the company eventually puts someone on the order of Jack Welch or Steve Jobs or even the real-estate titan Sam Zell in charge, it wouldn’t change the fact that WeWork is burning through cash like a wildfire going through a California forest after a seven-year drought and is on track to run out of money as soon as this spring.

And getting rid of Neumann doesn’t alter the fact that WeWork has an order-of-magnitude mismatch between what it owes its landlords in coming years and what its tenants are committed to paying for its services.

This is a company that — at least as it stands now — has a fatally flawed business. The only reason it’s stayed operating as long as it has is that investors were foolish enough — or so entranced by Neumann’s cult-leader-like personality — to keep pouring copious amounts of cash into it to the tune of nearly $13 billion.

Read more: WeWork’s competitors are scrambling to distance themselves from the coworking giant, but many are following the same script

Removing Neumann might make some lenders and investors more comfortable with putting even more money into the company. But unless WeWork’s new co-CEOs overhaul the company’s basic business model, the coworking giant will not be any more likely to survive into the future than it is now.

Scrutiny of Neumann has been increasing

It’s no surprise that WeWork’s board pressured Neumann to resign as the company’s CEO. He has long inspired skepticism even as he built WeWork into a real-estate titan with a $47 billion private valuation and an immense portfolio of leased office space. He has drawn increasing amounts of scrutiny in recent months amid a series of revelations about his personal finances and dealings with the company.

By selling stock and borrowing against his WeWork shares, Neumann has cashed in some $700 million of his holdings in the company. He made millions more by buying stakes in buildings and leasing space in them to WeWork and by registering the “We” trademark and selling it to the company.

Meanwhile, the company employed at least two of his relatives and gave his wife the power to help name his successor should he die or become incapacitated. And it set up a corporate structure right before it made its IPO paperwork public that insulates him from outside shareholders and can shift the tax burden on future profits from him to them.

After such deals and arrangements raised eyebrows among investors, WeWork and Neumann made a few changes. He agreed to return the money he made on the trademark and to accept some limitations on his ability to profit from the buildings leased to WeWork. His wife was removed from her role in succession planning. And Neumann agreed to reduce his voting power from 20 votes a share to 10 votes a share.

But a Wall Street Journal article last week raised fresh concerns about Neumann’s fitness to lead WeWork. The article included anecdotes about Neumann’s substance use and seemingly capricious and chaotic management style.

Read more: JPMorgan and UBS private-wealth execs explain why they’re doing more private share-backed lending to Silicon Valley. Both banks have lent to WeWork CEO Adam Neumann.

The Journal article said Neumann was forced to find his own way home from Israel after the flight deck of the private plane that flew him there found a stash of marijuana left there, presumably for the ride home. Executive meetings and company parties involved prodigious amounts of tequila, The Journal reported. And the company held a booze-soaked party immediately after Neumann held a meeting to discuss his decision to lay off 7% of WeWork’s staff.

In the wake of that article — and WeWork’s scuttled IPO, which it postponed even before the article amid Wall Street resistance — the company’s investors and board reportedly began serious discussions on Neumann’s future role at the company. Those talks culminated Tuesday with his resignation and agreement to reduce his voting power from 10 votes per share to just 3. He will remain as WeWork’s non-executive chairman.

Uber offers a cautionary tale

WeWork’s move to force out Neumann as CEO could be a positive step. When Uber took a similar step two years ago, first ousting its founder Travis Kalanick as CEO and replacing him with Dara Khosrowshahi, it led to something of a corporate makeover. Uber settled a legal dispute with the Google spin-off Waymo, restructured its corporate governance, fired a slew of people for sexual harassment, and vowed to be a better corporate citizen. Crucially for investors, it eventually was able to complete its long-awaited public offering.

Carlo Allegri/Reuters

But Uber’s experience also serves as a cautionary tale for WeWork, as replacing Kalanick didn’t fix Uber’s underlying business problems. The app-based taxi company is still losing billions of dollars and burning through huge amounts of cash. Khosrowshahi has proved no better than Kalanick at figuring out a sustainable business model. If anything, his task has become more difficult amid sustained competition, growing regulation, and increasing unrest among Uber’s drivers.

Read more: JPMorgan’s Jamie Dimon met with WeWork’s Adam Neumann this weekend to hash out how to get its botched IPO back on track

And Uber’s job is arguably much easier than WeWork’s. After all, Uber is basically a technology service. Though it duplicates a taxi business, it doesn’t own cars or employ drivers, at least not yet. It just provides a kind of online marketplace that connects riders with drivers. And eBay showed nearly two decades ago that operating a marketplace that brings together buyers and sellers of goods or services can be a significantly profitable business.

But unlike Uber, WeWork has few real claims to being a technology business at heart. Its basic business is leasing space from building owners on long-term leases, subdividing those spaces, and then subleasing them to other companies on much shorter-term deals. It’s had to spend billions of dollars leasing space — and has had to commit to spending billions more in the future so it can keep growing. It’s also had to spend billions of dollars building out and furnishing those spaces.

Read more: WeWork cofounders Adam and Rebekah Neumann are close friends with Ivanka Trump and Jared Kushner and invited them to Rebekah’s extravagant 40th birthday bash in Italy

It’s not unusual for commercial real-estate companies to invest a lot of money upfront. But typically such companies are buying buildings or are building out spaces for long-term tenants.

Some big numbers point to WeWork’s problems

That’s not the case with WeWork. It owns exceedingly few of the buildings it leases out. And its tenants aren’t committed for the long term. Even after WeWork has started to sign more large companies as tenants and pushed its members to sign longer deals, the average WeWork customer is still only committed to being in its space for 15 months.

WeWork

The basic problem with WeWork’s business can be seen in just two pairs of numbers:

• $47 billion and 15 years
• $4 billion and 15 months

The first set of numbers represents the total amount WeWork has committed to paying its landlords on its leases and the average length of the leases it has signed.

The second set of numbers represents the commitments WeWork’s tenants have made under deals they’ve signed with the company and the average length of time of the tenants’ deals.

Read more: The CEO of $1 billion WeWork rival Knotel says the idea of coworking is ‘over’

WeWork’s new co-CEOs — Sebastian Gunningham and Artie Minson, its former chief automation and chief financial officers, respectively — are likely to have an impossible time closing the gap on those numbers without either fundamentally changing WeWork’s business model or dramatically scaling back not only its growth, but its current operations and lease commitments.

And there are two more numbers that together represent a much more urgent problem than whoever’s name is on the door of the CEO suite: $2.5 billion and $1.5 billion.

The first number is the amount of cash WeWork had on hand in June. The second is the amount of cash it burned through in the first half of this year.

At that pace, WeWork could be out of cash by early May. With the IPO on ice for now and, with it, a promised $6 billion credit line, WeWork’s new co-CEOs will have to figure out how to find more money to keep the business afloat — or how to make some huge cuts to save what cash is left.

Read this: There are 6 billion very good reasons for WeWork to go public this year, even though Wall Street doesn’t want it

WeWork needs a massive makeover

While massive change could help WeWork stay in business, it’s unclear whether the company’s existing investors, such as SoftBank, can stomach such a radical overhaul. The promise of WeWork — what helped it garner a $47 billion valuation in the first place — was that it was essentially a tech company with the growth to match. Eventually — once it got big enough — it would be able to show the kinds of returns that other former money losers like Amazon now deliver.

Recognizing that WeWork is really in the real-estate business and needs to reshape its business to focus less on tech-like growth and more on boring things like operating expenses and lease costs is certain to further depress its already deflated valuation. After all, IWG, a coworking pioneer that’s about the same size as WeWork and actually profitable, trades at less than $4 billion.

Read more: 3 VC investors in flex-space startups slam WeWork’s governance and leadership as its valuation crumbles

SoftBank, which is trying to raise a second $100 billion Vision Fund, is reportedly loath to write down its investment in WeWork to even $15 billion or $20 billion. Taking it down even further may be out of the question.

Maybe the new co-CEO, neither of whom is a WeWork founder or as personally tied to it as Neumann is, will have the kind of perspective to tackle all of the company’s challenges — how to placate investors such as SoftBank, how to get costs and revenue more in line, how to build a sustainable business.

But by itself, replacing Neumann as CEO doesn’t solve WeWork’s problems. And no one should let themselves be fooled into thinking that it does.

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