“The most important pillars of our life are: where we live, who we’re with, who are kids and our friends are, where we work, how we study and how we grow as human beings… When I think of “We” I think of an ecosystem that brings it all together”
– Adam Neumann, CEO and co-founder, WeWork
In mid 2017, Masayoshi Son, Japan's wealthiest man and CEO of the Softbank Group, promised WeWork co-founder Adam Neumann, a couple of hours of his time. Following the meeting, Son and Neumann inked a deal that saw Softbank investing $3 billion directly into WeWork ($1.3 billion via a tender offer of existing employee stock and $1.7 billion in new equity).
Lead by Masayoshi Son, the Japan-based Softbank, has single-handedly changed the landscape of venture capital. Its overarching strategy to identify market trailblazers, pour hundreds of millions (sometimes billions) of dollars into it, and launch the company into the next stratospheric phase of growth, has made Silicon Valley pundits nervous.
In 2017 alone, SoftBank, via its tech-led $100 Billion Vision Fund, was involved in more than half of the top 10 biggest investments in venture backed start-ups, including a $2.25 billion investment in GM Cruise, the self-driving unit of GM; a $535 million funding round into food delivery service, DoorDash; a $9.3 billion investment into ride sharing service, Uber; and of course, its recent commercial office tie up with WeWork. This, on top of its existing ownership (through its subsidiaries) of Alibaba Group, Yahoo! Japan, FlipKart, and Slack Technologies.
WeWork’s fundamental business model isn’t unique. In fact, the idea to create shared space for-profit was brought to the mainstream in 1989, when Regus founder, Mark Dixon, identified an opportunity to offer tenants community office space complete with maintenance, staff, and a flexible lease term. When Regus went public in October of 2000, it was valued at £1.5B and ostensibly, was the first large-scale shared office space pioneer.
But, like many first movers, Regus fell into unforeseen business ditches. Namely, the first big dot-com bubble burst, which saw many tenants quickly vacate its offices around the world in favor of more affordable options like home-based set ups and coffee shops. Having inked long-term leases with landlords, the firm was left holding the bag with too few tenants to cover the gap.
After a near collapse, Regus re-emerged from bankruptcy and today, still remains a formidable player. But plenty of new entrants, like WeWork, have surfaced with different offerings.
Studying Regus shortcomings, WeWork took stock of how things had evolved, and what its target consumer, initially millennial entrepreneurs, wanted out of an office space. The company also examined how Regus got burned by the tech downturn, developing a new strategy to mitigate risk.
Like Regus, WeWork does sign long-term leases, before it renovates, and subsequently rents out hot desks and closed-door offices to members on a per month basis. Critics of the model suggest the company could face a similar fate to that of Regus. In many respects, the red flag raising is warranted, since WeWork is currently on the hook for about $1.9B worth of leases, and nowhere near profitable.
But Neumann and company have hedged against a possible member exodus. Rather than have each property held under WeWork’s main corporate entity, the company has spread its risk using corporate shelters, which it calls “special-purpose entities”, to isolate the parent from a possible blow up. In addition, the firm is inking lease deals that split profits 50/50, where incumbent landlords pay for the build out, and share in the revenue. WeWork is also adding buildings to its asset list, recently purchasing the former Manhattan flagship of Lord & Taylor, which will soon be the company's new headquarters.
Yet the most important source of stability it seems, is the firm’s new split profile of members. While initially, 95% of its members were start-ups (the segment most likely to fail in business) the pie is now sliced 3 ways – with a third made up of small to medium sized businesses, and the balance comprised of enterprises like Shopify, Microsoft, HSBC, Samsung, Lyft, and Facebook. The big firm movement into “We Space” means a more stable set of tenants helping to weather the cycle of start-up entrants and exits.
Regus is doing its best to stay relevant through its core brand, and millennial seeking offspring, Spaces. Spaces, is growing, with locations in Amsterdam, Rotterdam, London, New York, Melbourne and Sydney. The Office Group, controlled by US private equity fund Blackstone, is another brand growing globally.
IWG, the parent company, touts Regus as having both more locations (about 3000) and members (over 2 million) than WeWork - casting plenty of doubt on WeWork’s massive valuation.
Certain analysts agree, suggesting valuations are over inflated at $40 Billion and look more reasonable at $3 Billion based on comparable multiples. Skeptics further suggest that investors who are willing to put money in WeWork at a $40 billion valuation have to believe that each of the company’s members is worth about $156,250. By comparison, Regus’ members are worth roughly $11,000.
Using real estate to inspire grander community-oriented aspirations, through offices, and more recently living space (WeLive), and education (WeGrow), shows Neumann’s chutzpah where big mission-based thinking seems to be quieting traditional analyst folklore.
Who needs a middle man?
Commercial landlords and leasing agencies are scrambling to figure out how to adapt to WeWork’s momentum. Landlords in particular question whether WeWork can be a long-term tenant having learned the hard way through Regus’ downfall in the 90’s.
Leasing agents have a different paradox to navigate. As old leases come up for renewal, companies are opting for WeWork memberships over another lease with a locked in term. Moreover, most new WeWork tenants come to the brand directly, without a broker. Agents who’ve been used to comfy commissions from legacy tenant relationships, are now wondering what their financial future looks like. WeWork Space Services – the company’s brokerage initiative seeking to serve real estate solutions in and outside of WeWork spaces is only adding to that anxiety.
Bringing Community to the forefront:
While there are subtle nuances that work against WeWork’s offering, namely higher prices for multi-person offices, a festive atmosphere filled with start-up egos, and some events that come off as too promotional, the company has nearly perfected community co-working space.
Unlike its predecessors, WeWork has spread like a virus. In 2017 alone, WeWork opened 90 buildings across the globe. As of Spring 2019, WeWork locations numbered over 600. The company has attracted over 260,000 monthly paying members since inception in 2010 – and the demand is increasing. Occupancy rates rose to 84% across all establishments, up from 78% occupancy in 2017. In certain cities, WeWork is close to 100% occupancy, with prospective members waiting for vacancy.
Urban economics is another key factor bolstering WeWork’s value proposition. Each 100,000 square foot location, with 2000 employees, creates roughly 700 jobs in the city in which it opens. That same location spits out about 1000 jobs per year, and over a ten-year period, produces some 20,000 jobs.
Then, there’s the “Corporate America” cost advantage of moving employees into a WeWork space – a nearly $18,000 savings per head.
Beyond economics, WeWork’s profound understanding of who the core customer segment is, makes this growth story nearly unstoppable. Sometimes known as Gen-Y, Millennials are the nearly 80 million young adults who have already joined or are preparing to join the workforce. By 2020, nearly half (46 percent or so) of all U.S. workers will be Millennials. By comparison, Generation X (or Gen Xers), represent only a third of today’s workforce.
Millennials are the technology generation, having grown up with social media, camera phones, and a healthy network of friends. They are socially conscious, environmentally responsible, and don’t give a shit about whether they own a car. They also hate the idea of commitments, contracts, and lock-ins; which explains this cohort’s contempt for big-telecom, law firms, and commercial landlords. WeWork is in turn, tailoring their offering accordingly; setting the pace for what work and community looks like in the digital age…. and, we get it.
[https://www.economist.com/business/2018/07/12/big-corporates-quest-to-be-hip-is-helping-wework] company is somewhat protected from a blow up.