wework overvalued

One of the most successful coworking startups in the world is WeWork. In case you are not a millennial and who likes to work from a beanbag, here’s what WeWork is. Instead of leasing an office for a whole year, you can rent a space in WeWork’s 500 buildings in 97 cities. For somewhere between $150 to $800, you get a private office, a desk or the opportunity of a desk.

You focus on your work, and only on your work while they provide the furniture, internet, cleaning and housekeeping. WeWork has all the fun and exciting features of a startup – craft beer, young and enthusiastic people, pictures of people doing yoga and chairs that don’t look like chairs.

While the idea itself may not sound revolutionary, it is perfectly timed with the rise in freelancing and startup culture around the world. There are around 68 million freelancers in the United States alone. India’s gig economy, or the freelancing one, especially those who operate over the Internet, has taken off over the last three-five years. So much so, that one in every four freelancers is from India.

India dominates when it comes to software, with India contributing 50 per cent of the global freelancers in this domain, a new report from payments company PayPal said. The survey, among 500 freelancers in India, reported that a majority of the freelancers are under 40 with a mean annual income of ₹19,02,785. About 23 per cent of the surveyed has an annual income in the range of ₹40,00,001- ₹45,00,000.

WeWork is the 4th highest valued startup in the world, just behind Uber and its Chinese rival. A lot of experts call it massively overvalued, probably the most overvalued.  WeWork is planning to start a school called WeGrow, a gym called ‘Rise by We’ and renting apartments called WeLive, which all sounds a bit scattershot.

So what’s the deal? Is WeWork worth it?

The answer is just as interesting as what it says about our whole economy. The way WeWork makes money is or tries to, is actually pretty simple. It is starting to buy a few of its own building, but for the most part, here how it works:

First, it finds big, centrally located buildings in young, densely populated areas, and signs a five, ten, even fifteen-year lease. Which makes the landlord really happy, at least for now. And then it turns around, and sublease to you and I, on a monthly basis. Pretty simple, right. A little too simple, you might be thinking.

If WeWork can make money appear out of thin air by splitting a big lease into a bunch of tiny ones, why don’t the buildings do that itself? Isn’t WeWork just an inefficient middleman? Instead of paying one landlord, we are now essentially paying two. And that’s true. Nothing stops the owner of a building from creating its own shared offices. Some do.

But it’s now so simple. For two reasons.

First, WeWork and the owner are really playing two, very different games. At its core, WeWork is a giant $47 billion bet that its real estate will increase in value. Because if you and I pay more every month for a desk, WeWork still pays the same 10, 15, whatever year lease and they pocket the difference.

On the other hand, if can I say, when property value falls, they have to pay the difference.

Now each lease is under a different subsidiary, so if it can’t afford to make payments, the company, as a whole is somewhat protected. But if a bunch of them fail at the same time, like during a recession, it could be really, really bad. And remember that most of WeWork’s customers are small startups and freelancers, the businesses most likely to fail during a recession.

The owner, on the other hand, gets a consistent, arguably lower-risk paycheck and makes it building more valuable in the meantime.

The second reason is that WeWork has an unfair advantage. Unlike the property owner, it can set the prices unreasonably low, attracting far more customers. The secret is that WeWork is always on sale – you just don’t know.

Is WeWork sustainable? The VC-money angle

The answer is little, actually remarkably not so little, company called SoftBank. You may not have heard of it, because of its a multinational holding conglomerate. In plain English, a company that owns companies. A big pile of money.

SoftBank’s Vision Fund is nearly $100 billion provided by Saudi Arabia, the United Arab Emirates and companies like Apple and Qualcomm. The Vision fund makes even Goldman Sachs look more bronze than gold.

So what does it do with all that money? Mostly invest in tech companies. And when that runout, anything that remotely looks like one. Basically, add ‘big data’ or ‘blockchain’ to your name and then buy a bigger wallet, because Softbank wants all of it.

Just a few months ago, it poured another $2 billion into WeWork. And if you think that’s a lot, which, it is, it was originally going to be $16 billion. So Softbank, in a roundabout way, is paying for a part of your office, in hopes that the company will grow and one day makes a profit.

Which is all too common. Enjoy those $1 scooters, and cheap Uber rides because some venture capitalist somewhere is paying for them. It won’t last forever, just ask someone with Moviepass how that turned out.

But hang on. Why does SoftBank who likes tech companies like Uber and Bytedance, invest in WeWork, who leases real estate?

Well that’s the question – is WeWork a tech company, or does it just really want to be? Because if it’s just a middleman between property owners and renters, and Uber just a platform connecting drivers and riders, both of which use technology but suffer the economics of a non-tech company, then they’re a lot less exciting.

If that’s true, a lot of investors are investing a lot more than they should, and when they realize this, things are going to get ugly.

Think about it this way: A tech company can potentially have seven billion users instantly. A thousand downloads don’t cost any more than one. The scale is nearly unlimited. And therefore, so are valuations.

WeWork, however, will always have to buy or lease more spaces as more people join. It scales, but not in the same way.

To put it in perspective, there’s this other less exciting, coworking company called Regus. Regus is just valued at $4 billion. And fun fact, Regus actually makes a profit. What makes WeWork valued that extra $43 billion. Why is it valued like a tech company? And Regus based on how much money can it make.

It’s tempting to stop here. To say WeWork is just a real estate company and yes its overvalued. But that’s not totally fair. There is a reason that WeWork is so much more successful and it’s not just that SoftBank thinks its money is a hot potato, it’s because WeWork has mastered the art of storytelling.

Regus has nice professional photos and advertises with generic phrases like “Stay Productive”, but WeWork understands the millennials. Big art pieces, craft beer, and so much mentions of the word “community”.

“WeWork is a state of consciousness”

Roll your eyes all you want and trust me I have, but it works. And it does have useful data, on where people work, when they’re most productive and so on, which they can use to optimize and redesign buildings. that’s valuable information.

It has to decide for example how many conference rooms to build based on how much they will be used/ That’s worth thousands of dollars a month because if it builds even one too many rooms, it’s wasting space that could have been desks and made more money.

So is it a real estate or a tech company?

But make no mistake, its core business fundamentally relies on property values. That’s true no matter how hard it tries to distract us “Hey look over here, we are not just a real estate company, we are building a high-end gym in New York, we bought a wave pool company and we are starting an elementary school, which by the way costs $42,000 a year, a total of $388,000 from age 2 to 11.

Although to be fair, it’s no ordinary school, “A field of superelliptic object forms a learning landscape that’s dense and rational – yet free and fluid.”

Whatever that means, its not enough to save the company from the fate of Regus, who after the dot com crash filed for bankruptcy. To survive its first recession, WeWork will have to change its strategy or significantly diversify its income. Economic downturns are inevitable, you have to protect yourself by spreading your eggs across multiple baskets.


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