WeWork has worked hard to position itself as a fast-growing tech company with a bright future. SoftBank agreed to invest in the company at a $47 billion dollar valuation. But is it really worth that much?
Let’s take a balanced view on how much WeWork is worth, looking at the company from a few different perspectives: the “monopoly factor”, the business model, and the strength of the brand.
The “Monopoly” factor
In Peter Thiel’s book “Zero to One”, Peter speaks about companies being monopolies as a good thing. When monopolies encounter the simple consumer, it can cause unjust harm. But when monopolies encounter businesses, they are actually appreciated. For example, the only company today that has an “Oracle” database is Oracle. If you have an application that is written to work with an “Oracle” database, you simply don’t have any option other than to pay Oracle for a database. Therefore, Oracle can raise their margins and make you pay double or triple the fair price since there’s no other company that provides the same sort of service to create competition.
Unlike many tech companies who can create this sort of barrier using either technology (e.g. Google) or a very good product (e.g. Slack), WeWork simply does not have this factor. WeWork, at best, has a good back office to manage all the needs of their residents. But, as opposed to Google’s technology or Slack’s product, WeWork’s back office simply is not a meaningful differentiator when comparing to other businesses of the same type.
Copying the fundamental “WeWork” experience is, unfortunately for WeWork, quite easy, which means WeWork is the opposite of a monopoly (also known as a commodity service).
The Business Model
Many tech companies have business models that can show non-linear growth. This is because of two important factors: the network effect (a.k.a the “my friends use WeWork so I want to use it too” effect), which leads to decreasing marketing costs, and the economics of scale for software, which means you can decrease the cost of onboarding customers by building a “no-touch” product to the point where adding a customer barely costs anything except additional infrastructure costs.
Although WeWork does have a “network effect” to reduce customer acquisition costs, WeWork is a business that has extremely large linear growth factors: office rent, on-site employees, building maintenance, etc. The only non-linear factor they have is the power of their brand, which does make it cheaper for them on the acquisition side in terms of marketing costs.
By the way, WeWork’s network effect isn’t as strong as, say, Facebook’s, because the value of being at a WeWork space given your friends are there can shift pretty quickly if all of the sudden a lot of your friends decide to move to Regus (a WeWork competitor). And, you don’t really need *all* of your friends to be there. Having some of them there is probably enough to make it attractive — and that is, only assuming you actually care about your friends being at your co-working space, which is sometimes not the case (or even the opposite sometimes).
When you think “coworking space” today, you think WeWork. That’s a huge thing that can contribute to the success of the company. They are managing to stay ahead of everyone else in terms of the brand, and that does take a lot of expertise to gain and maintain over the years.
However, Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it”. So although their brand is the strongest tailwind for WeWork right now, it’s also the most fragile, especially after the recent setback of the company, which can, unfortunately, destroy its brand and turn it into a 2019 “Theranos” story on how to erase $40 billion dollars of value.
So… how much is it worth?
Well, since WeWork is not publicly traded then we don’t really know how much it’s worth. But since we’ve already determined that the business is pretty linear and a commodity, then its value should be similar to Regus (its largest competitor), plus the fact that it has a better brand. Regus is a brand owned by a publicly-traded company called IWG — International Workplace Group. The company is worth, as of today, $3.6 billion USD, which is about 13 times less than SoftBank’s last valuation of WeWork.
How does Regus compare to WeWork? As of today, WeWork has about 900 locations, and Regus has about 3,900 locations, which is four times more than WeWork.
So, how much do you think WeWork is worth?