- WeWork's rise and fall offers a stark warning for the AI era.
- The company claimed on Tuesday that "substantial doubt exists" about its future ability to operate.
WeWork and artificial intelligence do not, on the face it, have very much in common.
The office-sharing company has shown its true colors as a glorified commercial landlord, despite years of claims by its private investors that it could be a $100 billion business that spans tech, interior decor, and construction. An American dream!
In its second-quarter earnings, the company warned it had "substantial doubt" about its ability to continue, just four years after it was valued by private investors at $47.7 billion.
There is — bear with us — a parable here for the age of AI euphoria.
Since the launch of ChatGPT last year, private tech investors have abandoned their temporary pullback in startup investment to throw money at almost any company with AI in the name.
ChatGPT's creator OpenAI has bagged billions of dollars from Microsoft, while venture capitalists announced $10.7 billion of generative AI startup deals in the first quarter of the year, per data firm Pitchbook.
This over-exuberance risks polluting the market with pseudo-AI firms or, at least, those who overblow their technology.
WeWork's decline is, to be sure, down to certain fundamentals of the business. The company always billed itself as tech-first, but really it was a debt-ridden real-estate company.
Yet its tanked-up valuation was, in part, down to the effusive charm of its cofounder Adam Neumann.
Neumann played into the tech industry's love of a bullish founder and big claims, and was duly rewarded with a private $47.7 billion valuation. The firm's market capitalization is now about $330 million.
Its second-quarter earnings Tuesday reveal a harrowing section on "liquidity." At the end of the month, it had $680 million in liquidity, according to the filings, $205 million of which is cash while the rest is in the form of "first lien notes" – essentially debt secured with collateral – of which $175 million was drawn upon last month.
It's a striking state of affairs for a company that convinced of the world's most powerful investors into thinking it was more than 10 times the value of rival company IWG (current market cap: $2 billion) at the time.
Artificial intelligence companies make their money differently, mostly by charging recurring software subscription fees. It's a tried-and-tested and lucrative business model. But equally, investors would be wise to learn from WeWork and look under the hood of any AI firm claiming it will fundamentally alter any market.
There are already signs of exaggerated giddiness. Take, for example, the large numbers of CEOs racing to talk about their ChatGPT integrations on earnings calls. There is a lot of corporate executive noise about how AI might boost productivity and cut costs.
But the delivery of these promises is far from certain. Recent reports have suggested that ChatGPT's underlying large language model, GPT-4, seems to be getting a whole lot dumber and inaccurate.
Meanwhile, there are already AI startups backed by VC money that remain in a pre-revenue position. That basically means some savvy founders will have found ways of convincing investors to bet on them before they've even shipped a tangible product. A clear sign of a bubble.
In a post last month on X, formerly Twitter, Sam Hogan, founder of startup Context Labs, said there were going to be "losers" in the race to build AI products – namely a lot of "VC-backed teams building at the application layer" that have built products that are generic and easy to copy.
The AI crowd should get weeding.