Is WeWork doomed?
Where it all started, where it is now, and if it has a future
The idea that people might actually enjoy the space in which they work is a relatively new one. From industrial London to 1980s Manhattan workers have found themselves placed in drab and uninspiring surroundings. A hangover from the factory era when employees were stuck in uniform rows along assembly lines.
When blue-collars were swapped for white ones architects didn’t really know what to do except imitate the factory floor. Bosses would sit in their walled offices to the sides and workers would be collected along lines of cellular desks down the centre. Cognizant — occasionally — but positioned as if never. For many offices this remains the norm, but an increasing number of executives and humans are realising that work can be done in pleasant surroundings. They need not be spartan, devoid of imagination, a bored tapestry of grey. Cue the stratospheric rise of WeWork, an office rental company that thinks itself much more. To quote its founder Adam Neumann:
“WeWork isn’t really a real estate company. It’s a state of consciousness, a generation of interconnected emotionally intelligent entrepreneurs.”
Now that is a bold statement, something you might expect to hear from John. John, who is generally a good guy, but takes far too much LSD on weekdays and follows fringe religions on Reddit. However, Adam Neumann is, to my knowledge, a stable non-LSD non-fringe-religion kind of guy, so his zealous belief in WeWork coupled with its rocket-fuelled jet-propelled climb to a valuation in the 10’s of billions of dollars, means that we have to take his ethereal vision seriously. Or do we? Is WeWork’s 4 billion dollars of funding and 20 x revenue valuation indicative of a bubble? Or based on sane, sober calculations? Let’s break it down — but first, like any good story, or bad story come to think of it, it all began somewhere, sometime.
Three months later its doors opened and a mere month hence the business was profitable.
Adam Neumann and Miguel McKelvey worked in the same building back in 2008. A building that wasn’t quite full. At the time Miguel was plying his craft as an architect and Adam was as an embattled entrepreneur. His newest venture focused on protecting the knees of babies. The company called ‘Krawlers’ hawked baby grows with knee pads. An innovation that the world wasn’t ready for and perhaps never will be. Anyway as I was saying, this office that the two found themselves in wasn’t full. Adam approached the landlord proposing that he lease them a floor and that they run a coworking space. No, the landlord said. Adam persisted. Persisted for a long while. Ignored the numerous nos and was eventually granted a ‘no, but you can give it a go in this warehouse’.
Neumann and McKelvey fell in love with the space. It was perfect for the cool, young, millennial vision that they had. What was their plan the landlord asked? They hadn’t really thought about that. So McKelvey went away and spent the night building a website, incorporating the company, creating promotional materials, and drawing up crude floor plans. The feigned preparedness convinced the landlord and ‘GreenDesk’, their environmentally conscious Brooklyn-warehouse-based coworking, was go.
Three months later its doors opened and a mere month hence the business was profitable. They quickly filled all 5 floors with 70ish people on each. McKelvey and Neumann realised that coworking had fantastic potential and wondered about expanding. The landlord wanted to grow into his other properties, the pair wanted the freedom to go where best. It was immediately clear that the partnership had run its course and the founders sold GreenDesk to the landlord for a fee which no-one seems to remember, but was at least a million and a bit.
The innovation was the brand and the community atmosphere that WeWork created.
Noting that it was not really the environmental aspect of GreenDesk that had made it successful, but rather the community that it created and offered, Adam and Miguel founded WeWork in 2010. Coworking for the modern, want-a-nice-life-and-to-be-part-of-a-community, millennial.
Indeed coworking wasn’t the innovation. Nor was the way that WeWork or GreenDesk made money, catchily known as rental arbitration. Put simply, because it’s not particularly complicated, Miguel and Adam would rent an office space for X amount of dollars, spruce it up a bit, market it, and sublet it for cumulatively more than X dollars. But yes, that had been going on for ages and wasn’t innovative. The innovation was the brand and the community atmosphere that WeWork created.
Nowadays WeWork has over 200,000 members in 295 locations worldwide. And this is only set to grow, with the company adding 500,000 to 1,000,000 square foot of new space every month. Once a location has been identified WeWork are able to turn it around and get the first punters in the door within 4 months. An operational efficiency that is pretty much unparalleled amongst its competitors. How does it grow so fast and maintain a high quality across its locations? Technology.
The end result of all this tech is a well located, well put-together piece of WeWork that is ready for people to stream through its chic interiors.
WeWork leverages data on neighbourhoods to decide where is best for its future offices. In partnership with Factual, a location data provider, WeWork comes up with a rating for an area based on various important factors such as its proximity to amenities, transport links, and restaurants. Once it has found the optimal location it will sign the lease and bring in tech to scan the inside of the building and produce a 3D model that can be used to better understand the time and cost of the project.
This process takes just one hour per floor and lets the physical products team accurately map the space. WeWork squeezes in members with an average of just 50 square foot per person, and so maximising the space is essential to business success. Once they have the 3D model WeWork try to optimize the number of coworking spaces, meeting rooms and communal areas whilst ensuring natural light abounds. But even these decisions are increasingly the utterances of a computer system. WeWork has harnessed machine learning to create its own neural net that scrapes through all of the information held on the layouts and usage of existing locations in the WeWork ecosystem. From this data it learns and offers suggestions for the optimal number of meeting rooms and other such facilities in yet to be renovated offices.
And this algorithm is actually quite good, 40% more accurate at predicting meeting room usage than the professional humans. The end result of all this tech is a well located, well put-together piece of WeWork that is ready for people to stream through its chic interiors.
Last year New York headquartered WeWork generated around 900 million dollars in revenue. This year it is expected to generate 2.3 billion dollars of revenue.
All of this is very impressive, but does it justify such an astronomical valuation? To put it in perspective all we need do is look over at IWG, one of WeWork’s largest competitors. Whilst WeWork’s valuation is somewhere in excess of 20 billion dollars, with rumours that a new round of investment led by SoftBank could double that valuation to 40 billion in the very near future, IWG’s valuation is just 2.2 billion dollars, despite having over 10 times as many locations. Why is WeWork valued like a tech startup whilst IWG is confined to the valuations of a real estate business? The simple answer is growth. Last year New York headquartered WeWork generated around 900 million dollars in revenue. This year it is expected to generate 2.3 billion dollars of revenue. In contrast IWG’s revenue is actually falling.
However, even this phenomenal growth isn’t enough to convince a host of sceptics who look at WeWork as riding a dangerous growth bubble. The argument goes that WeWork’s main customers are entrepreneurs and freelancers. If there is suddenly an economic downturn then this is the first section of the workforce who will pack up and leg it to cheaper digs. Thus leaving WeWork to pay billions of dollars in rent on properties that aren’t WeWorking for them. Pun very much intended.
Those who see the sunnier side of things argue that WeWork’s clients are now 30% enterprise, the likes of IBM, Microsoft, JPMorgan Chase. And anyway, the coworking business is nicely buoyant during a downturn according to historical data. Indeed in 2008 GreenDesk and IWG actually performed well as the working world became displaced and looked to more flexible, unconventional workspace arrangements. On top of this WeWork are shedding lease risk by buying up properties and entering into co-management deals with landlords that don’t expose WeWork so full-frontally in the eventuality of decreased demand.
In reality the picture is mixed. WeWork has proven that it can quickly expand at scale whilst creating spatially efficient offices in a whole host of challenging locations. In order to assure its long-term viability and create a business resistant to financial downturn, WeWork will need to concentrate on growing its enterprise business whilst reducing its accounting risk by entering into more co-management agreements and purchasing its own buildings. If Miguel, Adam, and their 3000 person plus team can do this then WeWork has every chance of concretely justifying its sky-high valuation. WeHope.
This piece was featured in The Zip Files podcast — an irreverent weekly 20–25 minute podcast to help the busy millennial catch up with all of the week’s most important tech news. Here’s the episode in which this piece was featured:
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