The We Company, parent company of WeWork, is the latest in a string of
startup unicorns set to go public this year.
Its core business revolves around leasing whole buildings or parts of
buildings, transforming them into hip coworking spaces, and then renting
them out to everyone from startups and freelancers to large enterprises.
WeWork is now the single largest office tenant in New York and SoftBank
has valued it at 47 billion dollars.
It was created just less than 10 years ago with the premise of creating a
new way to work.
So these are coworking spaces where people can rent a desk for a day, they
can rent an office for a month, and the whole idea is that there is a
community behind it as well.
So you're not just buying desk or office space but you're buying into this
new way of working.
But just like other newly public companies such as Lyft and Uber, Wework is
not turning a profit.
In fact, it's hemorrhaging cash.
Believe it or not, they lost more money last year than even Uber did.
They burned through 1.9
billion dollars in cash and that was actually greater than the amount of
money they brought in, their revenue.
The only difference is, you know, for example, if no one called for an Uber
tomorrow, Uber wouldn't have to pay all those drivers.
But if no new tenants showed up at WeWork tomorrow, WeWork has, you know,
however many hundreds of buildings now that are ready for them.
And so that occupancy would be an expensive of WeWork.
Despite its losses, the company is growing quickly.
Now, WeWork says it's in 485 locations and has 466,000 members, up from
186,000 at the end of 2017.
How fast are you growing?
Very.
What kind of numbers are we talking about?
We're talking about probably one of the fastest physical expansions that
has been seen for the past 10 years.
Right. It's the sort of tech startup playbook.
Growth at all costs.
And at least in the private markets, investors have been fairly receptive
to this model.
That's why WeWork as well as Uber and Lyft, Pinterest, many others have
been able to raise so much money.
But what we're seeing right now as these companies go public is that
public investors may have a different attitude towards this strategy.
They may want to see a path to profitability, which so far WeWork doesn't
really have.
Basically, Lyft and Uber's stumbles may bode poorly for WeWork's chances of
a successful IPO, since all companies are currently focusing on growth
over profits.
I think the market will be less receptive to that story today than it would
have been a month ago.
It's going to be very difficult for them if they don't have a very clear
numbers-based narrative for how their loss profile is going to improve
significantly.
Traditionally, WeWork has relied upon funding from private investors, the
largest being Softbank, which has poured more than 10 billion into the
company, including 2 billion this year.
But once WeWork goes public, its value may depend on whether investors
view WeWork as a real estate company or a tech company.
Critics would say that it's just simply an overvalued real estate play.
All it does is take out leases, longer term leases, and then rent out
these spaces in the shorter term, which could be a recipe for disaster if
we ever were to see a recession.
We're not a real estate company.
We're a community of creators, and what we do is we take space and through
dividing it up, through sharing it up, we give creators all around the
world the opportunity to change the way they work.
But The We Company actually did recently set up its own real estate
investment platform, called ARK, so it can buy and develop properties
around the world.
The announcement came after Neumann received criticism for buying
buildings himself and leasing them to WeWork, potentially posing a
conflict of interest that could be alleviated through ARK, since it will
be run separately.
ARK will still be under The We Company's umbrella though and Wallace
cautions that with this new venture, the company is taking on even more
risk.
It means that when things get bad or when things change, it's harder for
them to be flexible.
Because if you rent the building, I mean at least theoretically there is a
cost that you can pay to get out of that lease.
It's harder if you actually own the thing to get yourself out from under
the costs associated with.
The company has also expanded into housing and education over the last few
years. One division, WeLive, offers coliving spaces in New York and D.C.,
basically flexible apartment rentals where residents share amenities and
can stay for days or months.
Another division, WeGrow, recently opened a for profit pre-K and
elementary school in New York, billed as a place that fosters conscious
entrepreneurialism for its students.
The company has even expressed interest in branching out into banking.
To better reflect all these various offerings, WeWork rebranded as The We
Company at the beginning of the year.
With all of this, WeWork is aiming to use its technology platform to
capitalize on the idea of community more broadly, whether that's in the
workplace, home or school.
So if investors do buy into this concept of WeWork as a diversified tech
platform, its value proposition makes much more sense.
I think part of what gives them that tech company vibe is the network
effect. And I think that in growing into other areas such as WeLive or
WeBank simply helps them solidify that network effect and that overall
it'll help drive value and eventually profits for them.
Right now though, WeWork's main business still is renting and leasing
massive amounts of real estate in some of the most expensive cities in the
world. It has 59 offices in New York, 47 in London, and 25 in the San
Francisco Bay Area.
While it competes with other coworking and office rental companies like
Regus, Industrious and Impact Hub, We Work is the only one valued like a
major tech company.
So this is the other thing about the sort of Jedi mind trick that WeWork
has presented to investors that are giving it such a lofty valuation, is
you know renting offices, you know, isn't really rocket science.
Right? So the risk is that they build WeWorks in a huge number of
buildings at phenomenal expense and don't have enough tenants.
And so if you have the full load of costs of renting and building out all
of these offices and furnishing, you know, kegs of beer or new ping pong
balls and you don't have tenants, it's going to be very difficult for them
to rationalize those costs.
If it's going to live up to this valuation, a key driver of profitability
could be the growing number of WeWork enterprise members, that is big
corporations that have longer rental contracts than freelancers or
startups.
40 percent of the business are long term commitments.
Okay. Longer than a year.
And then another 20 percent are longer than month to month.
The likes of IBM even Amazon are renting office space from them.
So the idea is in the future you got a lot of the subscription revenue
from the bigger companies and that is enough to eventually bring in money.
For now, WeWork says its losses are not a problem.
Minson also urged me to look at losses as investments because he said that
coworking is a proven business model.
And guys that may hint at the narrative the company will sell to Wall
Street as it heads towards its IPO.
So why not just focus on growth now and go public later?
If you're losing two billion dollars a year, then you have a very big cash
problem that you need to figure out a solution to, and the public market
is obviously one place that can do that.
Basically, given the rate at which WeWork is spending, it may need more
than what private investors can offer.
While the company recently raised another 2 billion from SoftBank, this
was actually a disappointment, given that SoftBank had been considering a
16 billion dollar investment.
There are just very few private players that can write those kinds of
checks that they need in order to grow at the pace they'd like to.
In this climate though, WeWork may find it hard to get underwriters
onboard.
One of the choke points that we see is that there are only a few
underwriters in the world that could lead manage a deal this big.
And so that is one of the things that WeWork is going to have to overcome,
is find a set of underwriters that are willing to tackle this, given the
rough sledding that both Lyft and then Uber have seen.
But assuming WeWork does go public soon, it's already amassed so much power
that some believe failure isn't even an option.
WeWork has now become one of the biggest corporate landlords, so some might
argue that the company is now too big to fail, that the real estate
developers which they rent from won't allow the company to fail because
they have so much at stake.
Of course WeWork's ultimate vision is far more ambitious than just being
propped up by developers.
WeWork wants to become a platform.
They don't want to just be coworking.
They want to be in the education space, the living space, potentially even
the banking space.
The idea is sort of the Amazon playbook.
You become so big, you invest so much into the business, that one day you
do turn a profit.