WeWork — Most Overvalued Start-up or Catch of A Lifetime?

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How GreenDesk became WeWork — The Initial Days

Miguel McKelvey thought he was just going to his friend Gil’s house to spend a Saturday night. But as he and Gil got on to the elevator, this tall Israeli guy walked in with his shirt off and began conversing with everyone on the elevator. Miguel, initially taken aback by his audacity, later learned that he was in fact Gil’s roommate. Apart from their 6 ft 8 inches frame, they had no commonality. Yet, as the adage that goes poles attract, Miguel McKelvy and Adam Neumann went on to become the Founders of WeWork.

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Adam Neumann on the left and Miguel McKelvey on the right
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A WeWork office in Culver City, LA

‘Most Overvalued Start-up’ — What’s the Backstory?

Given the time frame and the value proposition of the company, scores of real-estate traditionalists and company executives have pointed fingers at WeWork calling it overvalued.

1. Volatility of the real estate market:

When asked this question, Adam retorts. “WeWork isn’t really a real estate company. It’s a state of consciousness, a generation of interconnected emotionally intelligent entrepreneurs,” he argues. However, when you remove the free spa and the hardwood floors, WeWork is indeed a real-estate company, and is subject to all the risks that one would speculate for that category. The business model is simple: rent arbitrage. It charges its users more than what it pays its landlords.

2. Bigger competitors catching up

Although WeWork is enjoying a big share of the pie, it didn’t bake it. The concept of a communal work space has been there for decades, Regus (now IWG) being one of the big players with over 3,000 locations. When the CEO Dixon was interviewed, he says he is not worried about WeWork. “There’s no magic ingredient that they have that everyone else doesn’t have,” he says. In 2018, there were 19,000 co-working locations around the world*.

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Source: Wall Street Journal

3. Surprising lack of assets:

Although WeWork managed to spread out to 300+ locations, it still does not own any of the property. It signs 10–15 year lease contracts with landlords where it pays a fixed agreed-upon rate while it leases them for a higher price (it has $18 billion of lease obligations). But can they rake in more and more revenue this way even when markets crash? Critics don’t think so.

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Source: Financial Times

4. Risky ventures in unfamiliar territory

In an ambition to widen the net, WeWork has ventured into two major areas: residential space and education, completing the cycle of life. WeLive is said to be a co-living space consisting of dorm-like apartments with a gym and spa. While its goal was to reach 68 WeLive locations by 2018, it reached a scanty two.

How Does WeWork Justify Its $47 Billion Valuation

It’s time to flip the switch and take a closer look. Although some success could be attributed to the massive investment and pure happenstance, a whole lot of it is buttressed by data-driven initiatives and novel approaches to communal work-spaces.

1. Stream of acquisitions — some more shocking than others:

For a company that’s yet to file its IPO, WeWork has surely been active in the acquisition scene. They seem to have an average of acquiring one company every two months (including Naked Hub, Spacemob, Flaitron School, Meetup and more). What is surprising is the companies themselves do not seem to have a direct relation to communal spaces. They range from apps for construction workers to artificial wave pool generators to education technology.

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2. Technology begets data begets optimization:

As a company that added roughly 500,000 to 1,000,000 sq ft of space per month, it’s hard to be profitable without a rigorous and focused approach to using data. And WeWork knows it. The flowchart below demonstrates a very diluted version of the set of tasks they perform.

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A representation of WeWork’s process flow from acquisition to leasing — made by me
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3. Deep investor conviction (and pockets):

When asked about the supposedly inflated valuation in an interview, Adam is reticent but firm. He starts listing all the investors who back it up, including Benchmark Capital, Fidelity Investments, JP Morgan, Goldman Sachs, Harvard Management Company, Wellington Management, and of course, SoftBank.

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A chart of Benchmark’s investments over time — look at the # dots over the $1 bn mark

4. Steady expansion and growth:

WeWork needs 60 percent of a typical office space to be occupied to break-even. Guess how much they’ve been filling? 81 percent. That’s right, they raked in $1.5 billion in revenue in 2018 and $482 million just in Q3. This is not to say it’s been smooth sailing, financially. They had a net loss of $1.2 billion. However, at the rate at which they are opening new locations, acquiring companies and expanding internationally, that’s expected.

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A clear shift in company sizes over the years

Conclusion — A Revolution or A Recession?

One thing is certain — WeWork managed to break into a space that was populated by veterans and converted a blasé business model into a chic one. In the process, it also became an incubator for some of the most coveted start-ups and a networking ground for upcoming entrepreneurs. Our world is accelerating towards a sharing economy, and succeeding— as seen from Uber, Airbnb, Alibaba and the likes. WeWork is another great stride in this direction.

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The Startup

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Soundarya Balasubramani

Written by

23 year-old Product Manager, Bookworm and Writer | Aspiring Author and Activist. Read my work: www.bsoundarya.com. Hear from me: www.bsoundarya.com/subscribe.

The Startup

Medium's largest active publication, followed by +717K people. Follow to join our community.

Soundarya Balasubramani

Written by

23 year-old Product Manager, Bookworm and Writer | Aspiring Author and Activist. Read my work: www.bsoundarya.com. Hear from me: www.bsoundarya.com/subscribe.

The Startup

Medium's largest active publication, followed by +717K people. Follow to join our community.

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