Why WeWork Is Considering An IPO Despite Losing $1.9B in 2018

Why WeWork Is Considering An IPO Despite Losing $1.9B in 2018

The We Company, parent company of WeWork,
is the latest in a string of startup unicorns set to
go public this year. Its core business revolves around leasing
whole buildings or parts of buildings, transforming them into hip
coworking spaces, and then renting them out to everyone from startups
and freelancers to large enterprises. WeWork is now the single largest office
tenant in New York and SoftBank has valued it at 47 billion dollars. It was created just less than 10 years
ago with the premise of creating a new way to work. So these are coworking spaces where people can
rent a desk for a day, they can rent an office for a month, and
the whole idea is that there is a community behind it as well. So you’re not just buying desk or
office space but you’re buying into this new way of working. But just like other newly public companies
such as Lyft and Uber, Wework is not turning a profit. In fact, it’s hemorrhaging cash. Believe it or not, they lost more
money last year than even Uber did. They burned through 1.9 billion dollars in cash and that was
actually greater than the amount of money they brought in, their revenue. The only difference is, you know, for example,
if no one called for an Uber tomorrow, Uber wouldn’t have to
pay all those drivers. But if no new tenants showed up
at WeWork tomorrow, WeWork has, you know, however many hundreds of buildings now
that are ready for them. And so that occupancy would
be an expensive of WeWork. Despite its losses, the
company is growing quickly. Now, WeWork says it’s in 485 locations
and has 466,000 members, up from 186,000 at the end of 2017. How fast are you growing? Very. What kind of numbers
are we talking about? We’re talking about probably one of
the fastest physical expansions that has been seen for the past 10 years. Right. It’s the sort
of tech startup playbook. Growth at all costs. And at least in the private
markets, investors have been fairly receptive to this model. That’s why WeWork as well as Uber
and Lyft, Pinterest, many others have been able to raise so much money. But what we’re seeing right now as
these companies go public is that public investors may have a
different attitude towards this strategy. They may want to see a path
to profitability, which so far WeWork doesn’t really have. Basically, Lyft and Uber’s stumbles may
bode poorly for WeWork’s chances of a successful IPO, since all companies
are currently focusing on growth over profits. I think the market will be less receptive
to that story today than it would have been a month ago. It’s going to be very difficult for them
if they don’t have a very clear numbers-based narrative for how their loss
profile is going to improve significantly. Traditionally, WeWork has relied upon
funding from private investors, the largest being Softbank, which has poured
more than 10 billion into the company, including 2
billion this year. But once WeWork goes public, its
value may depend on whether investors view WeWork as a real estate
company or a tech company. Critics would say that it’s just
simply an overvalued real estate play. All it does is take out leases,
longer term leases, and then rent out these spaces in the shorter term, which
could be a recipe for disaster if we ever were to see a recession. We’re not a real estate company. We’re a community of creators, and what we
do is we take space and through dividing it up, through sharing it up,
we give creators all around the world the opportunity to change
the way they work. But The We Company actually did recently
set up its own real estate investment platform, called ARK, so it
can buy and develop properties around the world. The announcement came after Neumann
received criticism for buying buildings himself and leasing them
to WeWork, potentially posing a conflict of interest that could be
alleviated through ARK, since it will be run separately. ARK will still be under The
We Company’s umbrella though and Wallace cautions that with this new venture, the
company is taking on even more risk. It means that when things get bad
or when things change, it’s harder for them to be flexible. Because if you rent the building, I
mean at least theoretically there is a cost that you can pay to
get out of that lease. It’s harder if you actually own the
thing to get yourself out from under the costs associated with. The company has also expanded into housing
and education over the last few years. One division, WeLive, offers coliving
spaces in New York and D.C., basically flexible apartment rentals where
residents share amenities and can stay for days or months. Another division, WeGrow, recently opened
a for profit pre-K and elementary school in New York, billed
as a place that fosters conscious entrepreneurialism for its students. The company has even expressed interest
in branching out into banking. To better reflect all these various
offerings, WeWork rebranded as The We Company at the beginning of the year. With all of this, WeWork is aiming
to use its technology platform to capitalize on the idea of community
more broadly, whether that’s in the workplace, home or school. So if investors do buy into this
concept of WeWork as a diversified tech platform, its value proposition
makes much more sense. I think part of what gives them
that tech company vibe is the network effect. And I think that in growing
into other areas such as WeLive or WeBank simply helps them solidify that
network effect and that overall it’ll help drive value and
eventually profits for them. Right now though, WeWork’s main business
still is renting and leasing massive amounts of real estate in some
of the most expensive cities in the world. It has 59 offices in New York,
47 in London, and 25 in the San Francisco Bay Area. While it competes with other coworking
and office rental companies like Regus, Industrious and Impact Hub, We Work
is the only one valued like a major tech company. So this is the other thing about the
sort of Jedi mind trick that WeWork has presented to investors that are giving
it such a lofty valuation, is you know renting offices, you
know, isn’t really rocket science. Right? So the risk is that they
build WeWorks in a huge number of buildings at phenomenal expense and
don’t have enough tenants. And so if you have the full load
of costs of renting and building out all of these offices and furnishing, you know,
kegs of beer or new ping pong balls and you don’t have tenants, it’s
going to be very difficult for them to rationalize those costs. If it’s going to live up to
this valuation, a key driver of profitability could be the growing number of
WeWork enterprise members, that is big corporations that have longer rental
contracts than freelancers or startups. 40 percent of the business
are long term commitments. Okay. Longer than a year. And then another 20 percent are
longer than month to month. The likes of IBM even Amazon
are renting office space from them. So the idea is in the future you
got a lot of the subscription revenue from the bigger companies and that is
enough to eventually bring in money. For now, WeWork says its
losses are not a problem. Minson also urged me to look at
losses as investments because he said that coworking is a proven business model. And guys that may hint at the
narrative the company will sell to Wall Street as it heads towards its IPO. So why not just focus on
growth now and go public later? If you’re losing two billion dollars a year,
then you have a very big cash problem that you need to figure out
a solution to, and the public market is obviously one place
that can do that. Basically, given the rate at which WeWork
is spending, it may need more than what private
investors can offer. While the company recently raised another
2 billion from SoftBank, this was actually a disappointment, given that
SoftBank had been considering a 16 billion dollar investment. There are just very few private players
that can write those kinds of checks that they need in order to
grow at the pace they’d like to. In this climate though, WeWork may
find it hard to get underwriters onboard. One of the choke points that we see
is that there are only a few underwriters in the world that could
lead manage a deal this big. And so that is one of the things
that WeWork is going to have to overcome, is find a set of underwriters that
are willing to tackle this, given the rough sledding that both Lyft
and then Uber have seen. But assuming WeWork does go public soon,
it’s already amassed so much power that some believe failure
isn’t even an option. WeWork has now become one of the
biggest corporate landlords, so some might argue that the company is now too
big to fail, that the real estate developers which they rent from won’t
allow the company to fail because they have so much at stake. Of course WeWork’s ultimate vision is
far more ambitious than just being propped up by developers. WeWork wants to become a platform. They don’t want to just be coworking. They want to be in the education
space, the living space, potentially even the banking space. The idea is sort
of the Amazon playbook. You become so big, you invest so much
into the business, that one day you do turn a profit.

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About the Author: Oren Garnes


  1. maybe im a fossil being 26 years old but i physically see no point in wework. just work at your desk in your office at your job wtf lmao

  2. Who the hell would use their service? This is the dumbest idea I've ever heard. But it comes with free pretzels tho! Wow I just changed my own mind. I'm in!!!! Nope

  3. how can a company that just owns a bunch of buildings compare itself to Uber and Lyft LOL what a joke. If I want to rent a desk guess what, I have own a house and can stay home and save money!

  4. Sounds like a Bubble scheme- Rett Wallace has 20 years of experience as an investor and merchant banker at Allen & Company, Morgan Stanley, Lehman Brothers, and at his own firm

  5. The business model is sketchy but there is value for the users. If you rent a Wework space (even a chair) and network with other users you could find cofounders, investors, partners and initial clients all in one place. You also have access to other Wework space worldwide in very affluent areas.
    How much would it cost a startup to open an office in the middle of New York in the financial district? What could be the benefit of doing so with Wework for a relatively small fee?

  6. Im starting WeDeuce shared toilets in office and private residences around the world. We've partnered up with tens of thousands of home and office owners willing to rent out their Toilets to random strangers. When you gotta go take a #2 just open the WeDeuce APP to find the nearest available toilet. 4.99 a month toilet subscription. Or 6.99 WeDeuce Plus includes Toilets in Luxury residences, and prime locations

  7. depending on rents as a way to build a company wont work long term…that's why the company failing ….so filing a IPO to raise seems uneffective long term…companies like amazon renting spaces might work short term ….i think

  8. “Like other public companies, Lufthansa and uber lost profits” but it’s *not* a public company yet. That’s confusing the facts ???

  9. Losses are investment? Yeah. Keep telling people that lie. Too big to fail? Nothing! Nothing is to big to fail. The only truth is that when the too big failed, it will be a disaster for the average folks and the small time investors. IPO? Bankruptcy, more likely!

  10. It's like a good idea that was over blown due to low interest rates and the millionaire founders are trying to get Wall Street to take the hot potato off of their hands

  11. What kind of moronic title for a video is this? Of course they need to go public. To fleece more investors, raise more cash to burn, and so shareholders can exit this fraud . WeWork will finally be the domino that ends the phony silly con valley culture of “funding rounds” and goofy valuations for profitless junk. Get your popcorn ready for the next 18 months.

  12. Another mcdonalds type buying real estate then renting it out to others. The question is how much is their short term and long term debt ?

  13. Cant wait to see this company go belly up…. Will be alot of cheap "office" supplies at auction. I could use a cheap ping pong table and beer keg.

  14. Tech unicorns are a hoax. Their funders are a joke. How could anyone invest in bigfoot riding a unicorn and think it's real?

  15. So how can we be a community of entrepreneurs if we make most of our money from companies filled with non entrepreneurs?

  16. The amount of up-talk in this video is hilariously bad. We now live in a world where everyone, young and old, talks like a damn 13 yr old girl.

  17. I don't understand how this even works.. they're losing 2 billion dollars a year and they have the audacity to take it public.

    The whole startup culture reminds me of the housing bubble. It will all come crashing down. And it'll be worse than 2008.

  18. It's the only way for Softbank to see some ROI and to even out or at least cover parts of the loses occurred. The alternative would be Softbank losing 10% of its portfolio investments and 15,000 people losing their jobs and real estate developers left sitting on lease terms for 15 years and plenty of empty office space in 111 cities worldwide. #TooBigOfAProblemToBeAllowedToFail

  19. I'm thinking what it costs to "renovate" these floors to cool office space? Probably owes so many contractors bazillions .

  20. They are competing with established landlords who can afford to replicate what they do, and so at a lower operational cost. Neumann is full of it and he has cashed out big ahead of investors. There is little margin on subletting and a higher chance of negative cash flow. Pure Ponzi scheme with loads of marketing hoopla.

  21. Great bussness model: huge liabilities, not enough income and no assets. I must not be hip enough to understand what We are trying to achive…

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