Is WeWork’s Not-so-Subtle Real Estate Coup Worth $42 Billion?

This article gives an analysis of WeWork's valuation and business model, prior to its stated plans for an IPO.

Softbank’s recent $3 billion commitment to WeWork raises the shared workspace hawker’s valuation to around $42 billion. It’s a tech unicorn-worthy valuation, one the startups and serial entrepreneurs that have set up shop in WeWork spaces across 83 cities and 24 countries can likely get behind. But here’s the thing: WeWork, for all its slick branding and disruptive DNA, is at its heart a real estate play.

What started in New York in 2010 as a way to sell space to the growing population of tech companies hanging out in basements and backrooms has quickly become a disrupter to landlords worldwide – signing office leases, designing and building the interiors, then offering them as facilities for both startups and major companies alike including Microsoft and Bank of America.

WeWork has grown to 268,000 members and raised $12.1 billion over the course of 14 rounds primarily led by SoftBank, the Japanese multinational conglomerate – which has committed and funded a combined $6.4 billion alongside its Saudi Arabia-backed Vision Fund.

Next up: IPO, with analysts anticipating WeWork going public sometime in 2019. Yet WeWork continues to hemorrhage money.

Although the company is still private, they send out patchy dispatches of their financial health, painting a picture of a company yet to turn a profit. According to Bloomberg, the company lost $1.22 billion on $1.25 billion in sales in the first three quarters of 2018. The company posted $482.3 million in revenue during the third quarter, up from $241 million during the same period last year. As of the end of September, WeWork had $2.8 billion cash in hand.

“Poster child for excesses in the private equity market”

“As long as there is capital out there to fund WeWork, it doesn’t really matter if they’re cash-flow positive because they can still come in and disrupt the real estate space,” Joshua Varghese, portfolio manager of CI Investments’ signature global asset management division, recently said during a real estate investment conference in Toronto. “They’re offering 100 percent leasing commissions to agents to take tenants away from other buildings.”

Tom Dicker, vice-president and portfolio manager for 1832 Asset Management L.P., echoed Varghese’s sentiments at the conference calling WeWork the “poster child for excesses in the private equity market.”

“You’re taking a very capital-intensive, real-world business model and confusing it with FAANG (Facebook, Apple, Amazon, Netflix, and Google) and treating it in the same way,” Dicker said.

So, why the $42 billion-plus valuation?

More Than a Well-Designed Hot Desk

According to an article in the Financial Times, outside of its rapid growth when contrasted with office space competitors like IWG, the WeWork we see today is hardly deserving of the massive valuation.

“If the company’s equity value was based on the same multiple of sales as flexible workspace peer IWG (formerly Regus),” reports the FT. “It would be worth less than $3 billion.”

But the WeWork of the future, a vision of multiple ‘We’s – including the aforementioned WeWork and projects like WeLive, it’s utopian furnished, flex-housing, and, WeGrow, a series of for-profit schools promising “a conscious entrepreneurial approach to education” – that’s where the valuation comes into play.

“WeLive is going to be a bigger business than WeWork,” WeWork CEO and cofounder Adam Neumann told Wired UK.

Growth Through Acquisition

To get there, the co-working facilitator has been snapping up companies that put them in the right place to branch beyond their initial options.

Among the list of acquisitions are coding academy Flatiron School and online community Meetup. In September, WeWork paid $100 million for Teem, a Salt Lake City-based office management startup, which some say slides it closer to the office-as-a-service territory it has been targeting.

Its acquisition of MissionU, an experimental higher education community where students pay tuition from their paycheque once they land a job, was a $4 million, all stock deal, showing a significant faith in the company’s pursuit of education alternatives through WeGrow.

The growth through acquisition strategy is one that has been successfully executed by some of the more successful tech companies like Facebook and Google. It’s far from a sure thing. But the bet beyond hot desks and plug-and-play workstations to space-as-a-service HQs for mid-to-larger sized companies is unquestionably a disruption to the status quo that will be too attractive for already innovative companies like Microsoft to walk away from.

And if WeWork gets the model right there, as it already seems to have, who’s to say they can’t reshape schools and the way we live?


Andrew Seale

Andrew Seale is a Toronto-based business writer who contributes frequently to Yahoo Canada Finance, The Globe and Mail's Report on Business and The Toronto Star.