Can WeWork Live Up to its $10 Billion Valuation?

WeWork is attempting to disrupt office space with its shared economy approach, but can it really live up to its staggering $10 billion valuation?

Launched in 2010, WeWork is a chain of shared work spaces co-founded by Adam Neumann, a former Israeli naval officer, and Miguel McKelvey, an architect who designed retail spaces for American Apparel, with a staggering $10 billion valuation. But while it is set on disrupting office space just as Uber disrupted transport and Airbnb disrupted accommodation, can it really live up to such a valuation?

WeWork: the modern solution to the office cubicle

On a basic level, WeWork sublets offices, divvying up rented spaces for use by start-ups and freelancers. But in reality, it’s much more than that. Located in hot areas, WeWork offers hip working environments with sleek furnishings to a generation that has never known traditional office cubicles. Unlike WeWork’s competition in the market, its branding is proudly emblazoned across its spaces, attracting those who want to be associated with the WeWork way of life. It offers office equipment, printers, cartridges, and Wifi, along with free beer, full fridges, and Foosball tables. In New York, even bento box lunches from Momofuku can be arranged. A community manager at each location organises events, such as book clubs, Ping-Pong tournaments, yoga and meditation classes, or technology talks. The WeWork app, which serves as an internal directory and news feed, allows WeWork members to communicate ideas, post inspirational quotes, and trade tips. And WeWork members receive exclusive benefits, such as access to group health or payroll insurance plans, payment-processing systems, or cloud storage.

The co-founders hope WeWork will become the modern solution to the office: collaboration hotspots where new businesses can form and entrepreneurs can come together. “You’re not a small business by yourself anymore. You’re part of a large group of people who all feel like they are part of something,” says CEO Neumann.

Global expansion

Employing a reported 800 people and managing about 3.5 million square-feet across the world, WeWork has a significant footprint. It is present in six countries and 21 cities, 14 of which are in the US. And locations in Mexico City and Bengaluru — India’s Silicon Valley — are coming soon.

Prices depend on location, but individual packages start from around $45 a month for pay-as-you-go access, with the opportunity to also simply rent a desk for the day, and can reach the thousands for small offices. Alternatively a $350 “unlimited commons” membership allows the use of WeWork locations around the world, all booked simply via the WeWork app.

In 2015, membership more than doubled in size, growing from 16,000 to over 40,000. And as its cache spreads, companies including Red Bull, J ­Crew, News Corp, Business Insider, Merck, and American Express have joined the start-ups and freelancers working from WeWork locations.

Investor interest

Investors are keen. Last year, WeWork raised $400 million in Series E funding led by Fidelity Investments, JPMorgan, and T. Rowe Price, which brought its total funding to $969 million. The round also gave the company a valuation of $10 billion, up $5 billion on just six months before. It is now the 13th most valuable startup in the world, ahead of companies such as Spotify ($8.5 billion), Stripe ($5 billion), CloudFlare ($3.2 billion), and Slack ($2.9 billion).

WeWork has projected an operating profit of $942 million on $2.9 billion in revenue by 2018, based on the assumption that it will significantly increase its membership to 260,000 by the same year. But for now, with a reported $150 million revenue in 2015, that valuation is roughly 100 times its income. And sceptics wonder whether that’s really too high.

Traditional real estate wouldn’t be valued anywhere near as high. And, unlike Airbnb and Uber, WeWork’s large fixed expenses — rent paid to building owners and cleaning or maintenance costs — could leave the company vulnerable, especially if the tech bubble really does burst, hitting its high number of startup members. WeWork has also chosen to sign many long 20-year leases. While that could shelter the company from rent increases in the future, it could just as easily have locked WeWork into rents at their highest points.

Upending a $15 trillion market

WeWork does not agree. It argues that the company is not about real estate in traditional terms, but is instead upending office rentals — a market worth $15 trillion in the US — with a new model. It also argues that where it was once considered a little flaky, the self-employed market is now rapidly expanding, driving up demand for the modern answer to the office. Indeed, an estimated one-third of today’s labour market made up of “contingent” workers, being freelancers, contractors, and self-employed, and white-collar professionals are the fastest-growing segment. WeWork also reports that in fact mature companies are its fastest growing segment, diversifying its membership and highlighting the trend toward new ways of conducting business, as more and more companies turn to telecommuting and creative environments to stimulate their employees.

Neumann and McKelvey themselves are examples of the new market. The duo met working in Brooklyn where they were both renting office space in a partially vacant building (Neumann owned a baby clothing company which sold clothes with padded knees for crawling babies).  Neumann wanted to cut costs by renting out a corner of his office on Craigslist, so the duo proposed a co-working concept to their building’s owner. He eventually agreed and helped form Green Desk in 2008, the first incarnation of WeWork focused on environmentally friendly co-working spaces. But Neumann and McKelvey wanted to build their own brand. They sold their share in Green Desk — reportedly pocketing a few million — and launched WeWork, opening the first location in SoHo in 2010.

To justify its valuation, along with taking the new model of work around the world, WeWork is also set to launch co-living apartments, WeLive spaces. These will be 360-square-foot micro-apartments sat on top of WeWork’s co-working spaces, which will also feature benefits like bicycle parking, herb gardens, and libraries. And if the company can expand its membership and offering according to projections, its valuation doesn’t seem quite so far-fetched after all.