This article first appeared in Forum, The Edge Malaysia Weekly on November 20, 2023 - November 26, 2023

The recent collapse of WeWork Inc, which at one point was valued at US$47 billion, is a wake-up call for investors who attach lofty valuations to companies that are supposedly disrupting old economy businesses.

A combination of high interest rates and rising competition in a sector with low barriers to entry are now deterring funders and investors who previously put money more aggressively into ventures that positioned themselves as tech companies out to disrupt the old economy.

They are not betting on the future earnings of these tech companies based on past growth and performance. Investors now want more certainty about their timeline to profitability.

WeWork’s business model is essentially offering floors of purpose-built buildings to companies and individuals, enabling them to operate without the need for a permanent working space. It provides a new office/work lifestyle for those who have embraced the co-working concept.

The selling point of WeWork is that it does not bank on long-term leases. Instead, it offers flexibility to companies and individuals to choose a tenure that fits their requirements.

This flexibility worked well for companies that did not want to be saddled with the fixed cost of maintaining an office building that could be half empty as employees chose to work from home. The proposition met the demand of a multitude of start-ups that were concerned about their “cash-burn rate” and had to keep fixed costs as low as possible.

After adding a sheen of technology to its booking platform and backed by billions from Softbank, WeWork became known as a technology unicorn that disrupted the office space sector.

It was a unicorn in what was considered a staid segment of the economy.

But in reality, apart from its robust booking platform, there was not much technology in the WeWork business model. It was a real estate company taking up long-term leases on office blocks around the world, and then repurposing them into co-working space that was leased out on flexible terms.

Co-working space is essentially an upgraded version of the office suite, which has long been available to those who need a small workspace. Such office spaces were already in the market in the 1990s, long before WeWork and the concept of co-working space emerged.

The office suite is a room that comes with a desk and all the facilities found in any office. All one needs to do is bring their laptop, plug it in and go about their work.

These days, many building owners have repurposed their properties to cater for smaller companies. Even developers offer purpose-built small office versatile office (Sovo) units that can be used as a home, an office or both.

Sovo owners tend to offer short-term leases and are competitors to the likes of WeWork.

WeWork has a presence in 700 locations around the world and 40 million sq ft of office space. The office space is equivalent to about one-third of the total office space in the Klang Valley, which means it has the depth.

The company is undergoing a restructuring where many of the leases will be terminated and renegotiated. The process will be long and will burn a hole in the pockets of investors, whose investments are likely to be diluted.

WeWork was supposed to record operating profits by next year. However, the high leasing costs of premises taken before the pandemic, coupled with a growing work-from-home culture, have affected demand for co-working space.

WeWork is not the only tech unicorn that is under pressure to deliver profits.

Generally, the trend globally is for investors to put money into unicorns that have a more visible profit target. The emphasis is on the quality of the tech company’s asset and the timeline to profitability.

This is probably why some of the disrupters are cutting costs and becoming more focused on profits.

In India, which produced 65 unicorns in 2021 and 2022, the tech firms are experiencing a sharp cutback in funding. Investors are looking at start-ups that have a clearer view of their operating profitability before committing any funds.

That may be why Carsome Group, Malaysia’s first unicorn, is reducing its workforce to increase profitability.

Carsome has taken the used car market by storm. Its platform offers price comparisons on used cars and is popular among both dealers and consumers. Carsome also offers other related services such as car inspections and transfer of ownership. It has more than 4,000 employees in Indonesia, Thailand and Singapore.

It has been reported that Carsome is looking at a US$2 billion (RM9.4 billion) dual listing on Nasdaq and in Singapore.

Surprisingly, it was reported last week that Carsome was scaling down its operations especially in Indonesia and Thailand to prepare for a listing next year. The company is said to be looking at scaling down to improve profitability ahead of going public.

Many unicorns are essentially companies whose businesses are anchored on the old “bricks and mortar” economy. The difference is these firms use technology and algorithms to disrupt the status quo. WeWork and Carsome are some examples.

The unique propositions that these companies offer are the ability to scale up the business without increasing costs proportionately, and technology that cannot be easily replicated. There are not many companies with such qualities.

However, existing business owners are not sitting idly by. They are fast adapting to technology to suit the demands of the market. And they are not desperate for funds, unlike the unicorns.

WeWork’s case is only the start of a market correction as the tech hype comes face to face with reality. As long as interest rates remain high, many more unicorns will have funding issues in the months to come.

M Shanmugam is a contributing editor at The Edge

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