Why WeWork Is A Transaction, Not A Company

• We need to reevaluate how we regard WeWork and its valuation.
• Though at first glance WeWork may look at home with the majority of the world’s tech leaders, these companies don’t own the resources on which their operations rely on. WeWork, on the other hand, owes over $28 billion in rent.
• Its anticipated IPO may struggle in an increasingly difficult market.

WeWork is hiding in plain sight with the world’s digital innovators, but it’s neither a tech business nor a disruptive force – it’s a sheep in unicorn’s clothing.

At first glance, WeWork may look at home with the majority of the world’s tech leaders because they all rely on advancing digitisation. For example, the Alibaba Group is regarded as the world’s most valuable retailer, but it has no inventory. Uber is the world’s largest taxi company, but it owns no vehicles. Airbnb is a global accommodation provider, with no real estate. The list goes on.

WeWork sits in between these established tech businesses and startups, providing them with the flexible and temporary office space they require. Just like these businesses, WeWork is facilitating a transaction. But WeWork relies on the growth of the world’s tech industry (and other sectors) to fuel its own growth – but it is not part of the tech industry.

What’s more, the world’s leading tech disruptors transform their chosen industry in some way. WeWork is simply using an existing business model where it predominantly leases space, revamps it and fills it with anyone eager to tap into the world of flexible working. This business model has been around for decades.

A recent report from the BBC compared WeWork’s parent company, The We Company, with two of its leading rivals in the served office space: IWG and Servcorp, which realised operating profits of £154.1 million and £17.1 million respectively in 2018. The We Company’s operating profit was in the red by £1.5 billion.

Yet, The We Company’s value comes in at £36 billion, compared to £3 billion for IWG and just over £166 million for Servcorp, according to the BBC report. Such high valuations and The We Company’s investment strategy has reportedly even been called into question by one of its biggest backers – SoftBank.

Some might argue that WeWork stands apart from the competition thanks to its unique cultural stance. Speaking in a statement, WeWork’s founder, Adam Neumann, said: “Community is definitely a difference, but I think the real difference is intention and meaning behind what we do.”

The We Company has also increasingly started to purchase real estate. Neumann reportedly owns multiple properties that WeWork leases. What’s more, WeWork is creating an investment fund, called ARK, to raise billions of dollars to buy stakes in buildings where it will be a major tenant.

Not everyone is convinced that this move is a wise one. Frank Cottle, chairman and CEO of the Alliance Business Centers Group, said: “The We Company is a schizophrenic real estate company trying to deny its identity as it searches for a higher valuation. Once ARK is set up, it should be valued more like a self-dealing REIT than a disruptive tech company.  It’s surprising that analysts haven’t figured out that We is off its meds and needs some corrective valuation to protect future public shareholders from the speculations of Softbank and others.”

Future IPO

Following a more recent $47 billion valuation, The We Company’s debut on the public markets is now awaited with bated breath with many experts claiming it will be this year’s largest IPO. But, despite some success stories from the likes of messaging app Zoom, the market is highly volatile.

For example, Uber’s recent IPO was seen as a little lacklustre by many experts as the company was valued at significantly less than the $100 billion it had hoped to achieve. After one month of trading, shares for fellow ride-hailing app Lyft also plummeted.

A report from Business Insider states: “Lyft’s first month of trading reflected the second-worst for a large US-listed IPO on record with a 20.5% decline … only Facebook’s 21% drop in 2012 was worse.”

And with WeWork’s losses reportedly more than doubling in 2018 to almost $2 billion, how can such high expectations around its IPO ever be justified?

Well, fledgeling businesses often struggle to get out of the red in their early years. In a recent briefing in The Economist, 84% of companies pursuing IPOs reportedly have no profits. Ten years ago, the proportion was just 33%. The briefing also examines a panel of 12 tech unicorns (WeWork included) and finds these companies have burnt through $47 billion in the last five years; going through $14 billion in 2018 alone.

“This is profligate even by the standards of Amazon, which before and after its IPO was seen as a particularly profit-averse company; it had cumulative losses of $3 billion between 1995 and 2002. Uber lost almost $4bn just last year, excluding exceptional items,” according to the report in The Economist.

While the piece in The Economist provides some valuable insights into the world of tech unicorns, there seems to be one glaring error in the analysis. As I’ve already pointed out, why is WeWork regarded as a tech business at all?

WeWork provides the world’s real estate industry with a transaction. It’s a very important transaction, packaged in a very attractive way, to help many businesses eager to capitalise on the world’s growing flexible workforce.

But WeWork needs to tread carefully. The dot com crash of 2000 provides us with a cautionary tale from the past, where demand and revenues plummeted the world over, leaving companies debilitated by debt and long-term leases.

This is where WeWork sits in stark contrast to digital innovators like Alibaba Group, Uber and Airbnb. If these businesses had to shut up shop tomorrow, they’d walk away relatively unscathed. They don’t own the inventory, vehicles and accommodation they rely on.

However, WeWork reportedly owes $18 billion in rent over the next few years across more than 14 million square feet of office space.

We’ll have to wait and see what’s in store for The We Company. But as the IPO market gets increasingly perilous, WeWork could get gobbled up before you can say ‘dot com crash 2.0’.