In business, I find that all companies strive to tell a compelling story and work to back it up. Apple wants us to believe that it is a luxury brand and it is here to make our life and world better. Uber wants to be the Amazon of transportation and changes the world with its services. On a higher level, a lot of companies sell the story of their operational losses on the promise of future growth and profitability. Each firm tells its story in a different way. Each tries to differentiate themselves from the herd. Whether a company succeeds is a matter of producing evidence to back up the story.
Want consumers and investors to believe in a growth narrative in exchange for present losses?
- What is your economies of scale?
- How is your revenue growth?
- How does your expense compare to revenue?
- How are this year’s numbers compared to last year’s?
- How big is the Total Addressable Market?
- What is it that you do makes your company better than competitors?
- What are some success stories from your customers?
- What is the credibility of your team?
- What is your plan for innovation?
- How is your free cash flow?
- So on and so forth
The more pieces of evidence are presented to back up the story, the more likely the story can stand the scrutinizing eyes of investors, analysts and the public. In this sense, I don’t buy the story of WeWork.
It’s tricky to put a definition on WeWork, but essentially, it rents or owns a real estate and allows individuals or companies to use the space in exchange for some fees. It has grown significantly fast since its inception and is about to go public soon this year.
WeWork now has 466,000 members working out of 485 locations in more than 100 cities in 28 countries. Its revenue has grown from $75 million in 2014 to $1.8 billion last year. Three years ago, it had 1,000 employees; today, it has 12,000 and is adding 100 every week. It has installed 22 million square feet of the glass partitions that have defined an era of workplace aesthetics, and last fall, it became Manhattan’s largest tenant. (In Central London, it is second only to the British government.) In the wake of Uber’s (disappointing) debut on the New York Stock Exchange, the We Company is now America’s most highly valued start-up, at $47 billion — at least for the moment.Source: New Yorker
On the less sexy side, WeWork lost a staggering amount of $1.9 billion in 2018, even more than Uber, and $700 million alone the first quarter of 2019 (Business Insider). The economics of the model can pose trouble, particularly in times of an economic downturn. If an economic crisis forces knowledge workers and companies to retreat from renting out WeWork space, the company will be saddled with fixed costs which are their leases or related to owning buildings. Regus had a similar model to WeWork in 2000s, became the darling of Wall Street and went bankrupt shortly after.
In addition, there are other signs that I think are troubling at the very least.
He is known for making bombastic pronouncements, like this one at an all-company event last year: “There are 150 million orphans in the world. We want to solve this problem and give them a new family: the WeWork family.” In L.A., Neumann told his employees that the newly formed We Company would now have three prongs — WeWork, WeLive, and WeGrow — with a single, grandiose mission: “to elevate the world’s consciousness.”
As Neumann recently told a person close to the company, he believes that WeWork’s size and scale could put it in a position to help deal with some of the world’s largest problems, like the refugee crisis, saying, “I need to have the biggest valuation I can, because when countries are shooting at each other, I want them to come to me.”Source: New Yorker
What is the focus of WeWork now? Is it to be profitable in the real estate or coworking space? Or is it to change the world and help orphans? The potential “hands on multiple jars” approach is not a welcome sign in the times when the company loses a massive sum from operations every year.
The idea that countries need to come to WeWork to solve political and social conflicts seems more delusional than wildly ambitious.
In 2017, Neumann declared that WeWork’s “valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” He has long maintained that categorizing WeWork as a real-estate concern is too limiting; it is a “community company” with huge ambitions. “We are here in order to change the world,” Neumann said that same year. “Nothing less than that interests me.”Source: New Yorker
What does “it is based on our energy and spirituality than it is on a multiple of revenue” even mean?
It has lately been investing more in technology to better understand how people use its space, and Shiva Rajaraman, WeWork’s CTO, described a typical WeWork to me as “an Amazon warehouse with a lot more soul.” The company uses data to improve its management of conference rooms and analyze its customers’ interests to better plan community events. (Rajaraman said the company had found that WeWork members in Brooklyn and San Francisco enjoyed “urban gardening.”) The manager of a WeWork space in Flatiron told me that “one of our best learnings” since opening was that people liked sitting at several desks in the back of the room that were near the windows. This, he said, was something they hadn’t guessed, before admitting it “makes a lot of sense.”Source: New Yorker
More demand for coffee in the morning and people preferring desks near the windows are new revelations? It doesn’t really sound like compelling evidence of great artificial intelligence or future revenue stream.
On a practical level, SoftBank’s cash infusion helped WeWork cover the increasing costs of its whirlwind expansion as the real-estate market got more expensive. It also began spending heavily to fill all the desks it was adding. Just a few weeks after SoftBank’s investment, Shlomo Silber, the owner of Bond Collective, a New York–based co-working company, turned on his phone at the end of Rosh Hashanah to find dozens of his customers had forwarded an email from WeWork offering to buy them out of their leases and give them as much as a year of free rent. WeWork’s occupancy rate went up, but the deals made it difficult to determine the natural demand for its product. WeWork employees in multiple cities told me that savvy companies would take advantage of a few months of free rent in one WeWork, then wait for a new location to open so they could move and take advantage of another deal.Source: New Yorker
A high valuation for a money-losing startup needs to come with robust proof of significant demand. If demand in this case is inflated, will the valuation still be reliable or justified?
Just before last Christmas, Masayoshi Son called Neumann with bad news: A plan for SoftBank to invest $16 billion into WeWork, including $4 billion it had already promised — and to become its majority shareholder — was dead. The stock market had tanked, and the Vision Fund’s investors, including Saudi Arabia, were hesitant to invest more in real estate. SoftBank ended up investing another $1 billion in WeWork, and buying another $1 billion of stock from employees and other investors. This was more money than Neumann’s smaller rivals had raised combined, but it was still a disappointment, and presented as such in the media. At the company summit in January, Neumann told employees that news coming from outside the company was often “fake or misinformed.” (In 2017, he told the Economic Club of New York he thought fake news was “a great term.”)Source: New Yorker
When even your biggest advocate scaled back the support and confidence…
A lot more details can be found in the profile by New Yorker. Above are just notable pieces that I think can tell a lot about the company and its CEO. Kudos to WeWork for what they have done so far. Noone should deny the credit they deserve. As they already have 24% of their desks are occupied by companies with more than 100,000 employees (Wired), there is a reason to believe that WeWork will be able to stick around, even in tough times. However, the hype and the gigantic valuation, I think, are a bit excessive. The evidence isn’t convincing enough. The evidence for concern, so far, has been, though.
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