Why Is WeWork Worth so Much?

Pretty sure all they do is rent out office space. Something's not adding up...

WeWork is worth an insane amount of money.

Why Is WeWork Worth so Much?

The company just announced that it’s raising $430m at a whopping $16B valuation, bringing total funding to $1.43B. On the list of most valuable privately held companies, they’re now tied with Snapchat and ahead of SpaceX, Pinterest, Dropbox, Theranos, Spotify, Lyft, and Zenefits.

Think about those companies. Theranos is reinventing blood tests, Zenefits is the fastest growing startup that’s ever existed, and SpaceX is building something that even NASA couldn’t figure out. Freakin’ NASA.

I’ve been hearing a lot about WeWork for the past couple years after it got valued at $10B but, since I work in the coolest office in the world, renting a desk at a coworking space hasn’t been a priority. With this latest announcement and veiled questioning, I couldn’t help but wonder what the hell is so special about WeWork that makes it worth so much? I mean, the company only has 50,000 members in 80 offices.

Let’s talk about what WeWork does.

How WeWork works…

Think of WeWork as an office leasing middle man. The company rents space and makes it pretty, you need space, so they rent that pretty space to you. On the most basic level, that’s all they do. More specifically, WeWork leases floors of buildings, entire structures, and any primo, available real estate they can get their hands on. Note that WeWork isn’t actually buying any space, just leasing it from owners and property managers.

Ok, say WeWork gets its hands on a dope piece of property in downtown San Francisco (they now have five of these). Time to build an office with all the bells, whistles, and decorations you can hope for. Wi-Fi, desks, conference rooms, printing stations, couches, snacks, custodial services, a reception area – all of these amenities are available for their “members.” It’s like a typical, modern office experience except they aren’t building a product and they don’t have any employees.

Then it comes down to dividing up the space and charging accordingly.

WeWork membership costs $45/month. If you want to rent a desk for a day it’s $50 plus the membership fee. $350/month gets you unlimited access to the shared workspaces but a dedicated desk will cost you anywhere from $275 to $600/month (depending on the office location, demand, etc.).

And it’s not just for individual, wandering professionals. Large companies like American Express, Business Insider, and Merck use WeWork too, renting out private office space for up to 100 employees. Rather than signing a 5- to 10-year lease, building out a semi-permanent office, and doing all the maintenance, these organizations can pay WeWork a premium and give their employees the same feel of a fully-stocked, traditional office environment.

Why they’re worth $16B

If you’re a freelancer without an office, paying $400/month seems like a good deal to get out of the house, avoid joining “those people” who post up at Starbucks, and have the opportunity to meet some interesting people. In this case and for companies not wanting to commit to their own lease, WeWork is providing an incredible service.

But here’s the kicker: WeWork is being valued as a tech company, not a real estate company, and that might not be a good thing.

Boston Properties, the largest publicly-traded office real estate company, owns 47 million square feet of office space and has a market cap of $18B. The company has real, tangible, assets and is valued only slightly more than WeWork who’s renting a total of 80 offices.

Tech companies are valued higher than similar-revenue companies in other industries because tech products are scalable, easily measured, and (mostly) easy to monetize.

The formula for determining a company’s value is pretty much based on 2 factors: how much money they make (revenue) and how much money they can make (multiple). Traditional businesses with a small market or a non-scalable product will have a lower multiple (something like 2 or 3 times their current revenue) while tech companies are given much higher multiples (like 20 or 30 times their revenue) because everyone assumes that at some point they’ll flip a switch and start making a ton of money.

For example, Facebook bought Instagram for $1B before Instagram made money because Instagram’s user engagement was off the charts and it was clear how Facebook could use ads to monetize that engagement (which they’re doing now). This is the type of thinking that people point to when talking about the “bubble bursting” and runaway valuations.

When WeWork raised $400m in 2015 at a $10B valuation their revenue multiple was 66.7x while companies like Airbnb and Dropbox were in the 25x range. At least that’s according to this guy.

Valuation aside, WeWork has successfully created a new market for “micro-office space” that older, established companies like Boston Properties have been ignoring. WeWork’s membership subscriptions and premium offerings are a great way to extract value from customers, but what happens when WeWork’s arbitrage game stops working? If building owners decide they want to create their own shared workspaces, WeWork might find itself in need of a new business model.

Which is where WeLive comes in, a new “coliving” concept WeWork has been beta testing. Based on WeWork’s investor pitch deck that was leaked in August 2014, the company plans for WeLive to account for up to 21% of its revenue by 2018 (+$600m). That’s a big bet, but, if they can truly reinvent how young people live together, it might pay off for them.

Note: In a strange twist, turns out the chairman of Boston Properties personally invested in WeWork. Talk about hedging your bets…

Global domination

It’s worth noting that this latest round of fundraising was led by two Chinese companies, Hony Capital and its parent company Legend Holdings. Hony’s plan is to help WeWork launch in China and all they’re seeing is dollar signs. Or I guess it’d be Yuan signs…

WeWork currently has international offices in Israel, the UK, Canada, Netherlands, and Germany with Mexico, India, South Korea, China, Hong Kong, and Australia coming soon. Couple those new markets with the prediction that 40% of the workforce will be freelancers by 2020, WeWork could be sitting pretty over the next few years.

And while the company’s valuation is 100% inflated, you have to admit the founders discovered a couple of monster addressable markets: people who work but don’t want to rent an office, people who need a place to live. It’s a land grab from their perspective and the $1.43B in total funding gives them a huge leg up.

We should all be excited to see one of two inevitable scenarios play out. Investors realize that they’re smoking too much sticky icky, competition starts growing like weeds (because pretty much anyone can do what they’re doing), and the WeWork valuation implodes like Marco Rubio’s presidential campaign. Or we all find ourselves writing inspirational notes on chalkboard walls to promote cross-functional synergy, networking at a popup potluck, and emptying our pockets for our benevolent WeWork overlords.

I’d gossip around the kombucha cooler, but only if they have those peanut butter pretzels.

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