WeWork’s success cannot be denied. The coworking startup is valued at billions and has a presence in various major cities across the world.
Yet, from their early beginnings, people were skeptical about WeWork’s valuation and financial model. The reservation many industry and commercial real estate experts have is that their model is too risky, and could possibly be sustainable only in a growth cycle — such as the tech and startup bubble we are seeing today.
A recent article in the Wall Street Journal addresses the concerns and the appeal behind WeWork’s model.
Simplified, WeWork’s model is appealing because it brings in profit and revenue in the short-term. The concern is that long-term, there are no guarantees that the model can withstand a recession or a bubble burst.
At the same time, it’s because of this risky model that WeWork has been able to get the valuation it currently has, with only a few years of track record.
The higher the stakes, the more you can win (or the more you can lose).
It’s a slippery slope that can easily be avoided.
Duncan Logan, Chief Executive of RocketSpace, told WSJ that “The traditional approach is just a fundamentally high-risk model.” And to him, it’s a risk that isn’t worth taking.
RocketSpace’s operating model is different than WeWork’s. And although the earnings aren’t as appealing in the short-term, long-term it reasonably ensures Duncan that the company won’t go bust even in a recession.
“Generally, the company intends to be an operator of the spaces that would take a fee, with landlords responsible for much of the cost of building out the space and collecting much of the upside as rents go up.
Mr. Logan acknowledged the large margins of the arbitrage model make the operating model “not as attractive” by comparison in the short term.
But if you’re doing the math over two cycles, he said, it’s a far better return, because you don’t go bust.”
RocketSpace’s model isn’t the only one that would allow for growth and sustainable expansion.
Serendipity Labs is using a franchise model (much like that of hotels and fast food restaurants) to grow and expand its brand.
This is an attractive model, as it allows for fast growth without the need for Serendipity Labs to raise millions or invest them out of its own pocket.
The question remains whether WeWork will be able to handle and stay afloat even in a recession. But if there are other (and better) financial and operating model options out there, is the risk truly worth taking just for short-term returns?
We don’t know. This is unprecedented within the workspace as a service industry and only time will tell.
But like Jamie Hodari, CEO of Industrious, said in a recent interview with Allwork, “there’s going to start being real winners and real losers in the industry.”