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WeWork & Rate Changes
WeWork filed for Chapter 11 bankruptcy today. This is a story worth taking a deeper dive. Case studies (or maybe autopsies in this case) can be really helpful. Looking at the experience of other companies, their successes and their failures can teach us more about our own companies. Why is WeWork a good case study? Because at one time, this company was worth more than any other U.S. Startup up until that time – $47bb. It was a highflyer with a charismatic CEO. Their business model was simple – provide a space for people to work together. The business model involved renting out cool office space all over the world and then subleasing it to sole proprietors and individuals who wanted to work in a community setting. They rented individual pods, but also reserved desks and even exclusive offices or groups of offices. Its CEO, Adam Neumann was great at raising capital from the likes of big names like Softbank and Starwood capital.
Lesson #1 – Wisely assess the credibility of bigger than life leaders. It is true that there are some, like Steve Jobs, who will be true revolutionaries in their fields. But the majority will make big promises that fall short. Again, this doesn’t mean there aren’t great leaders out there. Just be careful not to buy projections and estimations hook, line, and sinker. Neumann claimed WeWork would become the next Uber and Facebook. But four years after its peak, it is filing for bankruptcy protection. Not only was Neumann reportedly charismatic, but also neurotic, so much so that he was eventually outset by the board in 2019. The way WeWork would secure its office space is it would sign 10 to 20 year leases, but only ask its customers to sign month-to-month leases. This is a mismatch of long-term obligations on WeWork’s expense side with short-term commitments on revenue for the customer side. This is not an impossible business model, but definitely a risky one.
Lesson #2 then is to be careful about long term commitments. There are times when you may need to invest in a new facility, bring on a new set of teammates, or take out a longer-term loan to fund your growth. But every time you do this, you are increasing risk. You are creating a long-term obligation that will be there, even if your revenue goes down. Long-Term expenses can stay static while revenue is dynamic and constantly changing. Again, there is nothing wrong with long-term commitments as such, but weigh them carefully and wisely. More often I see small businesses experience a surge in revenue and respond with a surge in expenses. There is often an assumption by small businesses that the surge in revenue is the new normal. It may only be temporary – so be careful and thoughtful as you consider how to respond to it. Once Neumann was gone, a new management team came in with a goal to cut expenses. They began renegotiating leases and tried to take a more practical approach to growth. Then Covid hit. The very cornerstone of the business model, that people would rather work in community with others than alone, crumbled in the face of lockdowns and Covid 19. It’s really amazing to me that they lasted as long as they did, considering the seismic shifts brought on by the pandemic.
Lesson #3 is that even the best of business models can change dramatically and in short order. No matter how good a small business leader may be, sometimes the landscape changes in dramatic fashion. This is captured well by the book, “Who moved my cheese.” by Spencer Johnson. In the book, mice have been content to eat a certain block of cheese. Two of the characters realize that the amount of cheese is dwindling, so they go searching for it somewhere else. Two of the other characters just keep eating only to eventually find that their cheese has moved. The reminder for us is that there is no unlimited supply of cheese. And even when you find it, it is prone to move. A wise small business owner must keep their eye on the horizon for change and adapt to that change. If they don’t, they are going to find themselves with no cheese to eat. So if change is inevitable, how you navigate that change will make all the difference in what kind of legacy your small business leaves. This makes me admire companies who have been around a long time all the more. These are companies who have successfully navigated a host of different environments and challenges and are somehow still standing. That is admirable.
We saw a big move in interest rates last week. When the week started, the bond market was communicating to the Fed, you’re going to have to raise rates more to slow down this economy. But a few reports hit last week that had a major effect on rates. One was the jobs number. Fewer jobs were added to the economy and the unemployment rate ticked up a smidge. Sentiment changed quickly, and it is as though the bond market suddenly thinks the Fed has a better chance of a soft landing. This is certainly possible, but the odds are stacked against them. The good news, in turn for consumers, is that mortgage rates which were pushing 8% ticked back down into the mid 7% range. So as you can see, not only can business conditions change on a dime, but so can interest rates.
I mentioned the value of companies who have been around the block a time or two earlier in this episode. Did you know that our bank has been around for almost 90 years. The bank has survived World War II, the hyperinflation of the 1970’s, the dot com bubble bursting, the great recession of 2008, and the recent pandemic. Ultimately, we give glory to God for his provision for this institution, but we also give thanks to our 98 current teammates and to all of the teammates who came before them to help us keep adapting to a landscape that is always changing. If you don’t do business with us, we would love the opportunity to earn your trust. Start your financial conversation with us today by exploring our website or by contacting your local branch. If you’ve found this podcast helpful, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. And until our next episode, God bless you.
-President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on November 7, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.