Analysis: Is WeWork at $10B the most unjustified valuation since the dot-com bubble?


WeWork, a co-working space designed to serve entrepreneurs and startups have announced their latest round of funding, an eye-popping $400M Series E.

This latest round valued the company at an incredible $10 billion, making it the World’s eighth most valuable venture-backed private company, alongside Dropbox and Airbnb, meaning they’re now considered a more valuable proposition than companies like Spotify ($8.53B), Stripe ($3.5B), Square ($6B) and Slack ($2.8B).

Valuations taking from WSJ’s ‘The Billion Dollar Startup’ resource.

This is double its $5 billion valuation that came just six months ago, and naturally raises discussion around the ‘B-word’ even for those that are strongly in the ‘we’re not in a bubble’ camp, which for the record includes me.

As WeWork is not a software company, it’s hard to comparatively analyse their valuation but nonetheless, doing so does help provide some context as to where WeWork sits amongst the World’s ten most valuable venture-backed private companies. And ultimately, if it’s getting valued like a software company, then you would imagine that it’s investors are also using typical software metrics to assess its worth.

Valuation per user

Let’s start by looking at their valuation per user/customer.

WeWork currently has 23,000 customers in 32 locations. This is a tiny amount of users, but can obviously be looked at in two ways (Small userbase or big potential) Either way though, it’s clear that the $10 billion valuation does not come from their current customer numbers.

But just how closely does it match up in comparison to the other most valuable venture-backed private companies?

It feels ridiculous using that chart, but it really does press home how out of place WeWork is amongst the others in the top 10, at least when it comes to valuation divided by user numbers.

Multiple of revenues

In fairness, those with a low per user valuation are often justifying their valuations (or at least attempting to) by the amount of revenue they are generating. And with WeWork essentially a service business, then we should be able to expect them to be competing a lot closer to the other companies in the top 10. But do they?

Although this puts WeWork on a more level playing field, it still remains significantly behind it’s peers. However, it should be pointed out that their admittedly high multiplier is still better than no multiplier as was the case for Pinterest and Snapchat who generated ‘some’ and no revenue respectively in 2014.

So what is WeWork actually worth?

WeWork prides itself on its big profit margin, and has previously compared it to companies such as Uber (approx. 20%) and Chipotle (approx. 27%) so for the sake of argument I am going to suggest we estimate WeWork’s gross margin at a very healthy 25%.

Using Uber as a guideline (valuation approx. x 21 earnings) , and the fact that most real estate companies trade at 18–20x earnings, I think a valuation between x20 and x30 of earnings is a more than fair reflection of the true value of WeWork.

2014

$150M Revenue

25% margin= $37.5M earnings.

$37.5M x 20–30 = $750M-$1.125B

2015

$400M projected revenue

25% margin= $100M earnings

$100M x 20–30 = $2B-$3B

So, in the absolute best scenario, I would only value WeWork at $3 billion as of today, more than three times less than what it has been valued at in its latest investment round.

And yes, it takes some time to bring down the ratio between earnings and valuation, but WeWork needs to be growing around five times faster than it currently is to come close to justifying it any time soon.

And for those who believe it’s unfair to measure it against software companies, Regus, the shared office space company that offers more traditional office space than WeWork, has a market capitalisation of around $2.9 billion and 2014 operating profit of about $163 million.

Of course, there is a market potential in terms of WeWork growing their customers, but this is a finite market, and it’s not a scalable business in a traditional sense, the very reason which make software companies so appealing to investors in the first place. And although WeWork argues it needs real estate the way Uber needs cars, and Airbnb needs homes, unlike them, WeWork has extremely large fixed expenses in the form of rent, and as such is much more vulnerable in an economic downturn than a software company or even the two companies it compares itself to.

While it did get my alarm bells ringing, I don’t think this investment is proof of a bubble, however, I certainly feel justified in calling it the least justified valuation since the dot-com bubble, with the potential of it being the deal that ended up pulling the rug out from under our feet.


Do you think I am right in calling this a ridiculously overpriced valuation or am I missing something wildly obvious about their model?

Let me know on Twitter @neilswmurray