Startup FInance

How to Avoid Becoming the Next WeWork

Like any company preparing to go public, WeWork faced intense scrutiny of its finances and leadership after filing IPO paperwork last August. A closer inspection of its books by investors raised concerns about WeWork’s governance, financial management, and potential to become profitable.

Even after former CEO Adam Neumann stepped down and WeWork considered dropping its valuation from $47 billion to as low as $10 billion, the company still could not garner enough interest from investors and has postponed its IPO indefinitely. 

While one might initially dismiss WeWork as an outlier and throw it into the pile of absurdly spectacular tech startup failures alongside Theranos and the Fyre Festival, it is worth taking a closer look. Behind Neumann’s questionable $5.9 million trademark deal and $60 million private jet was something far more common: a lack of robust financial controls.

The myth of controls vs. growth

Many early-stage companies push internal controls to the back burner, instead focusing on business strategies that lead to fast growth. Implementing and auditing data quality, regulatory compliance, and financial practices are perceived as expensive and a hindrance to a company’s ability to move quickly. Furthermore, it can be hard to establish scalable systems that will evolve with a company as it grows and its needs change. 

Although passing on formal processes in favor of growth tactics may contribute to expansion in the short term, it is arguably not a great long term strategy. As reporter Jordan French notes, “It doesn’t take a failed IPO for poor internal controls to rear their ugly head.” Private companies in many stageswhether going public, raising a funding round, or just scaling quicklywill likely face the same type of intense scrutiny as WeWork, so it is necessary to have strong financial controls in place when the moment strikes. This, French states, “will prove vital not only for any future plans for going public but also for keeping finances in the black and establishing credibility.”

Of course, enforcing formal financial procedures and conducting regular audits is much easier said than done, especially for early-stage companies that lack budget and are laser-focused on scaling quickly to avoid sudden death. Startups can’t realistically pause their growth tactics while they implement controls, nor can they have controls that impede their agility. Implementing the right systems, however, can empower employees to be more agile, not less.

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Prioritizing control

A company’s finances are its lifeblood. Revenue is at the top of every executive’s mind, but spending—the other side of the coin—often isn’t talked about, at least not until after the books are closed at the end of the month. But while there’s no direct lever to control revenue, executives can have direct control over spending—with the right solutions in place.

Legacy finance systems were built to solve for a centralized procurement process, but that isn’t how companies operate anymore. As more employees are making more purchases from more vendors, finance teams need to evolve their approach to managing spend. Emerging software can deliver the critical functionalities and workflow automation necessary to support employees in the End User Era

But it’s about more than just finding a product that works. Whatever the spend management process is, it requires adherence from the entire workforce in order to function effectively. Therefore, leveraging solutions that are easy and seamless for employees to use is a must. If no one follows the process, then it doesn’t matter how effective it would be in theory. 

Just as important as the user experience is the process workflow. Employees already use a number of enterprise platforms, so they may resist adding another option to the mix. Similarly, they might struggle to remember which one contains the purchasing policy. Embedding proactive policy controls into employees’ existing workflows makes for an easier user journey and guarantees compliance by ensuring that the necessary approvals are obtained before any company money is spent.

Another capability that gives you control and encourages adherence? Intelligent software that limits employee spending to a pre-approved amount, no matter the payment method. This prevents individuals from going over budget and eliminates rogue spending. Automating the request to reconciliation process means that finance teams can forget about tedious manual tasks and focus on more strategic work. 

Gaining visibility

Many traditional purchasing processes are fragmented between requestors, approvers, and finance teams. Uniting these disparate efforts into a single, automated workflow creates efficiency, scalability, and transparency. Perhaps most importantly, robust controls and visibility into purchasing allow finance teams to act in real-time to push and pull the spending lever.

In order to avoid a WeWork-style embarrassment, finance teams need to put robust financial controls in place early on. In the past, establishing formal processes meant making a tradeoff in growth and agility—but today, this is no longer the case. Companies can now enable controls and give employees the purchasing power they need to do their jobs. This financial governance will support future growth as a private or public company.