WeWork maturity transformation. The saga continues …

So the ongoing WeWork saga takes another turn, with news surfacing recently that they don’t have enough cash to last them through 2019. Neither financing option, SoftBank or more additional debt, look particularly appealing.

Despite their $2.4bn cash balance as at the end of June, they have real estate cap-ex to pay for in Q3 that was supposed to be paid through IPO proceeds, which is no longer happening.

WeWork has pursued a business model of securing long-term real estate contracts whilst renting out floor space over the short-term, providing flexibility to businesses. This maturity transformation is something similar to what AWS has done, turning large capital expenses into variable costs. It is also similar to banks, who take on deposits from customers on a short-term basis, whilst lending out for mortgages and business loans over the long term.

This model has worked out well so far for AWS and the banks, although big banks nearly came undone in 2008 during the financial crisis were it not for generous rescue packages. In the UK, there was a run on the bank at Northern Rock, with customers queuing up to get their deposits back.

Both AWS and WeWork’s business model hasnt been tested during a recession so it will be interesting to see if customers are happy paying a higher price for a product with time horizon flexibility. I suspect AWS will fare well but I am not so sure on WeWork.