What WeWork is missing

Why the trendy office-rental company has not yet filled its $18B shoes, and how it (maybe) still can

One of the more interesting pieces of news coming out of the last few weeks was the round raised by WeWork that reportedly values the company at $18B.

This is crazy.

WeWork rents out office spaces. It decorates them with trendy furniture and cool amenities and allows for short-term rentals. It offers some “networking” opportunities. It is even experimenting with living spaces. But what it really does is rent out office spaces, which is a business that rarely attracts the type of high-growth-oriented venture funding that WeWork has received.

So how has this rental-office-space-manager managed to rocket from a powerpoint deck to an $18B valuation in seven short years?

On the face of it, the answer seems obvious. It has grown rapidly, with revenue reportedly moving from under $100M in 2014 to over $500M in 2016. It addresses the enormous office real-estate market. Its customers are generally longer term with significant lock-in. And a competitor can’t just move into the space with a new app —WeWork’s enviable position is earned.

But more determinative still is this: its trendy office spaces reportedly command higher prices than the market, meaning it can project higher margins, meaning it has what really, really looks like a competitive advantage. And a massive high-growth company with a meaningful competitive advantage, an enormous addressable market, high barriers to entry, and high customer lock-in looks like a truly great investment.

Except, that’s not what WeWork is. Because WeWork does not have a competitive advantage. Because there is nothing meaningful that WeWork does that can’t be replicated by its competitors.

The most distinct elements of the WeWork model — its design and amenities — are fully and entirely replicable. Even its more proprietary innovations — pioneering short-term and one-desk rentals for example— have an extremely limited competitive moat. WeWork has developed an innovative model for sure, but it is one that is destined to be a victim of its own success; it is one that is destined to be replicated. When that happens, those enticing margin projections will fall.

This rise of the competitors hasn’t happened yet because asset-intense models — like office space management — don’t move and react and pivot as quickly as the tech companies that WeWork’s financiers are used to. But they will still react, and by the time they do, WeWork must have found a way to stay ahead of the competition.

To do that, WeWork has to pursue one of three paths:

The first is eating up desirable real estate. WeWork can develop an effective monopoly on high value real estate in its target cities, and it can use that power to extract higher rents. This generally works great in the real estate business. But it is hardly a novel approach, it is hardly without its entrenched competitors, and its hardly what investors are looking for when they value a seven-year-old company at $18B.

The second is to use its nascent community-building features to drive some sort of network effects. WeWork has a valuable position operating on both sides of the employment network, where contributors can rent out desks, and employers can rent out floors. It can look to leverage this spot in the middle to ensure that employers need office space to access the “WeWorkers”, and the “WeWorkers” want to be part of the same network so they can access the employers. This approach is not out of the question, but it is not easy to do and it is not clear WeWork has made meaningful progress on this front.

The third is branding. WeWork can look to become such a “cool” space to work that its useful in job postings; it attracts talent. Branding, of course, is what gives, well, brands across the world their sustainable profits. These are some of the largest companies in the world. This can work! But of course, this is not easy either. And it is harder still to do in office space than in, say, shoes.

Perhaps five years from now we will see WeWork sitting in the hottest real estate in every major American city; perhaps we will see engineers identifying as “WeWorker” on Twitter and working exclusively in these spaces; perhaps we will see WeWork office space as the way the new startups tell the world that they have arrived.

Or perhaps, we will see a host of trendy office space managers offering nitro brews and modern art, an homage to the WeWork model of the 2010s; a company which pioneered the move but has been relegated to just another middle-tier office-rental company with a very, very crowded cap table.