> “If I showed you their cash-flow statement, you would not compare it to a real-estate company,” said Henry Ellenbogen, a portfolio manager at T. Rowe Price. “You’d compare it to a brand or tech company—maybe Chipotle or Uber.”
> WeWork said its December revenue puts it on an about $150 million annual revenue run rate. It also said the month’s annualized operating income puts its valuation at roughly 100 times income. It expects to grow significantly in years ahead, which would lower that ratio. Landlords typically trade between 18 times and 20 times earnings, according to Jed Reagan, an analyst at real estate consultants Green Street Advisors.
> Price depends on location. In the company’s Financial District headquarters, it charges $400 a month for a desk and $1,400 a month for a small two-person office, well above the area’s rate for such space.
> The business is a risky one in which its costs, fees paid to landlords, are fixed, but its revenues from startups and established businesses can fall quickly when the economy slows.
> “The small-to-medium-size businesses, they get particularly impacted in a recession,” said Jon Halpern, who ran shared office space firm HQ Global Workplaces in the early 2000s.
> HQ grew rapidly in the run-up to the dot-com bust. But in the recession that followed, its value plummeted. It ultimately sold itself to Regus.
> Landlords typically trade between 18 times and 20 times earnings
This is my favorite part. So WeWork is "trading" at 33x on projected annual earnings and yet these contracts can easily be broken. When it all falls down (it will, but probably less dramatically than we've seen in the past) this type of business will be hit the hardest. Not having fixed cost structures are typically why so many tech startups can be valued so highly.
> You’d compare it to a brand or tech company—maybe Chipotle or Uber.
I get the Chipotle analogy, but Uber definitely does not make sense. Uber neither owns nor leases the cars, so they don't need the massive capital. The drivers provide that. And Uber scales pretty easily: hire a bunch of contract drivers in your new city, and then open it up. Whereas WeWork has to find office space, sign up for multi-year leases, re-architect and re-decorate it, and then can get monthly memberships.
If you break it down, WeWork is "24 Hour Fitness for Coworking" (or insert your favorite gym name).
In fairness, the comparison was to "cash flow statements". But even that comparison seems a stretch considering Uber's cash flow is tracking to $10b/$2b (gross/net).
I have a hard time understanding why you would not compare this to real-estate. Its certainly not a brand or tech play. If the market slowed it would certainly take a hit. Most of these places have monthly contracts and its highly tied to how well the economy is doing.
With that said, I really do appreciate the services these kinds of places offer. While they charge above market rate for sq.ft., they make up for it in services. I do not have to worry about anything within the office and can simply work. They usually have amazing internet, some free coffee/drinks and cater towards keeping me being productive. They offer nice community benefits as well.
Instead of thinking of WeWork as Airbnb for desk spaces, I like to think of them more like office hostels. They are relatively cheap spaces depending on how much of it you need and and how private of an area you want.
They offer community events and shared spaces to help connect founders with as many other people as possible. They're not all startups like at accelerators, but also include remote office workers from big companies who haven't rented an official space yet. So it is quite the diverse crowd.
If you like working in coffee-shops, give WeWork a try. It was a worthwhile couple of months and I met some good friends.
It's definitely not like Airbnb, as the producers own the space, the consumers rent it by the day, and Airbnb connects the two for a fee. WeWork lease the office spaces themselves and rent it directly out to consumers, ala Coworking.
The only secret sauce is if they can get a large enough following nationwide (especially for startups) to get a household name, such that you go directly to their location in your city, rather than Googling for Coworking.
This company provides inspirational, collaborative, nice office spaces for very high prices (compared to traditional office space). Their outsized profits will encourage competitors to enter the space and undercut them on price. Is there a way they can defend against that?
- Their events provide some sort of network effect and marketing
- The current group of startups provides some sort of network effect
Still, their customer base consists almost entirely of price-sensitive, savvy, early-adopters, so any new competitor would be known about without having to do much marketing, and could start without all the nice events in the beginning if the price is lower.
I just don't see how this business is defensible long-term...
I suspect that if you ask them they will say that there are network effects in that a) you can travel and use other wework spaces with a single membership and b) you get access to a community to hire from, seek advice from, network with, etc. For me those would not command a large price premium and so am incline to agree with you that it's not very defensible.
That said, a capital heavy business like this doesn't need as much defensive power as a tech company. Very few challengers will have access to the capital needed to compete with wework at scale (and there are scaling benefits here) so the competition won't be crippling.
WeWork did a great job of capitalizing on the move to smaller more agile companies. I don't think that "startup hype" is going to die. It's cheaper than ever to start a company and the market for tech companies is excellent right now. It's not easy to do, but getting $1-3MM in funding is accessible to talented people and once they get that in the bank, they're not going to open an office-- they're going to WeWork. This is huge for their business and it also enables the creation and maintenance of small companies who want to do things lean until the build a market and revenue stream (or maybe in some cases, adoption to drive further venture investment).
I've seen WeWork do great things for companies in NYC by just giving them a place to work and a community to work with.
Still, WeWork is not just another. They are actually a next-generation Real-Estate company! WeWork makes it clear that working is not just about your desk. It's also about your environment, the other people you interact with, the events that come to your space, the coffee you have (and in the case of WeWork, the architecture and design of your floor!). This is very cool for the future of company/working culture.
Is there history behind the $355MM Series A funding, and does anyone have statistics for other large A rounds? I have never heard of such a large investment on the front side.
Much more similar to private equity financing / bank loans, as opposed to traditional VC investment.
WeWork needs lots of upfront capital to cover security deposits, build out spaces (tenant improvements), prove enough assets to take 250k sq. ft. at a time for 15 year terms, etc.
Lots of coworking spaces have raised significant 6, 7, or 8 figure sums (WeWork definitely getting more than most), that mostly fly under the radar in terms of "companies that raise huge amounts of capital."
Which is kind of a ripoff, dontcha think? That's about what I pay for all my internet access and triple that of Netflix, Hulu, Amazon Prime & NY Times.
It really depends on how much you value the content. I pay for the WSJ. People need to earn a living. We fight for McDonalds employees to earn a fare wage but we complain because we don't want to pay for newspapers. There's nothing wrong with "premium content".
For the frequent WSJ reader, several hundred dollars a year makes sense. For a casual reader, it doesn't - but they still want the opportunity to convert me to a frequent reader. That's why they offer previews via search engines, etc.
> WeWork said its December revenue puts it on an about $150 million annual revenue run rate. It also said the month’s annualized operating income puts its valuation at roughly 100 times income. It expects to grow significantly in years ahead, which would lower that ratio. Landlords typically trade between 18 times and 20 times earnings, according to Jed Reagan, an analyst at real estate consultants Green Street Advisors.
> Price depends on location. In the company’s Financial District headquarters, it charges $400 a month for a desk and $1,400 a month for a small two-person office, well above the area’s rate for such space.
> The business is a risky one in which its costs, fees paid to landlords, are fixed, but its revenues from startups and established businesses can fall quickly when the economy slows.
> “The small-to-medium-size businesses, they get particularly impacted in a recession,” said Jon Halpern, who ran shared office space firm HQ Global Workplaces in the early 2000s.
> HQ grew rapidly in the run-up to the dot-com bust. But in the recession that followed, its value plummeted. It ultimately sold itself to Regus.
Let me guess: this time it's different?