Capital stack mistakes that lead to business failure
When WeWork filed for bankruptcy in 2023, the postmortems focused on Adam Neumann's eccentricities, the failed IPO, and SoftBank's staggering losses.
Which are arguably all compelling narratives, but they miss the more instructive lesson:
WeWork didn't collapse because Neumann’s idea was fundamentally “bad” (it wasn’t). It collapsed because of a fatal capital stack mistake.
Understanding why it happened is important for any business leader making financing decisions today.
(And I’m not just talking about billion-dollar tech unicorns here.)
A real estate business dressed as a tech company
When Neumann founded WeWork in 2010, he did so with the ambitious goal of creating a network of office spaces located in Class A office buildings that would be subdivided. He wanted to attract an array of smaller tenants or provide larger companies the option to more easily have multiple locations with sophisticated workplace optimization tools and data analytics.
That’s a straightforward core model and there was genuine demand for the product. Neumann positioned the company as a tech startup, even though it was fundamentally a real estate play. Because of this, he was able to attract large investments from tech investors.
SoftBank invested $18 billion in equity as WeWork expanded into over 800 buildings globally.
The company also accumulated $18 billion in borrowings and committed to roughly $2.2 billion in annual office space rental payments.
But all of this was layered onto a business that had never achieved a positive operating profit before interest and debt service.
That combination of massive fixed lease obligations, heavy debt, and negative operating cash flow left no margin for error.
When the 2019 IPO collapsed and the implied equity valuation fell from $47 billion to below $10 billion in a matter of months, there was no financial cushion to absorb the shock.
As of the beginning of 2025 the company's equity value had fallen to just over $1.5 billion as it continued to operate in 600 buildings globally with WeWork’s capital stack mistakes instrumental in its downfall.
It's time to talk about capital efficiency.
The structural WeWork business failure
WeWork’s downfall was hastened by a burdensome “Other People’s Money” (OPM) heavy capital stack that included $18 billion of borrowings and office space rental payments of some $2.2 billion annually.
It’s worth sitting with the point that this was a structural failure and not an operational one, because it connects directly to what we've explored in earlier articles on capital allocation danger and opportunity cost.
Operational problems like weak unit economics, pricing pressure, staffing challenges are painful but usually fixable.
Capital stack mistakes are structural, which makes them different.
Once a business is locked into $2.2 billion in annual lease payments with no path to positive cash flow, the options disappear fast. There is no pricing adjustment that unwinds a burdensome lease obligation and there is no cost-cutting that neutralizes billions in fixed debt payments.
WeWork's capital stack limited its flexibility, but it also guaranteed a specific outcome once conditions deteriorated.
How Amazon used OPM without being consumed by it
Amazon's early story offers a useful counterpoint and it's instructive because it doesn't “look clean” from the outside. Amazon went public in 1997 and by 2000 had burned through its creation-cost equity entirely. During a period of intense expansion beyond books, the company raised over $2 billion in borrowings, briefly creating a capital stack skewed almost entirely toward OPM. Which sounds reckless on paper.
But two factors separated Amazon from WeWork fundamentally:
First, leadership had reasoned, evidence-based confidence that the model would produce positive cash flows as it matured. Amazon had already demonstrated operating profitability from book sales. The expansion was a calculated bet, not a hope.
Second – and critically – Amazon borrowed more than it needed. The company held $822 million in cash at the end of 2000 and $540 million at the end of 2001, before turning cash flow positive in 2002. That liquidity was their insurance. It preserved the margin for error that WeWork never had.
What this means for your business
The lesson isn't that OPM is dangerous, if you've followed me for any amount of time, you’ll know how essential I find debt, leases, and other financing tools as components of a well-designed capital stack.
But OPM without margin for error is dangerous.
As we'll explore in future articles, designing a strong capital stack doesn’t simply require you to find the cheapest financing. But it does require you to maximize what you can responsibly borrow while preserving enough operational breathing room to survive the scenarios you didn't plan for. WeWork is a reminder that the absence of that discipline can result in business failure.
This doesn’t have to be your story. I teach entrepreneurs and business leaders how to become business rich with my articles, The Value Equation, and the resources on my YouTube channel.
Stick around to learn more.
