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“What happens when startups disappear and WeWork gets stuck with a lot of expensive space?” – that is the question posed by Andy Kessler in his recent article for the Wall Street Journal (WSJ) titled “The Company Implosion Pageant”.

Kessler, writes a regular column for WSJ on technology and markets and where they intersect with culture and is also the author of several books including Wall Street Meat and Eat People. In this latest article, he discusses a variety of multibillion-dollar valued companies that could fail, and fail hard. The common themes amongst all these companies are minimal sales, significant losses, and an unproven business model.

“Venture capitalists are funding questionable businesses they pray will scale,” says Kessler, who points out that WeWork’s business model, “works great in up cycles but is still unproven, especially in downturns.”

On the surface WeWork appears to be doing well, however, reportedly filling 81% of its desk space, 21% over the 60% needed to cover its overhead-cost obligations. It has already set up co-working sites in 24 countries and has plans for further expansion, especially in the Asia-Pacific region, a prerequisite of SoftBank investments. It has acquired or started a number of new ventures including “co-living” space WeLive, a wellness club, a coding academy, and an alternative education elementary school as part of their WeGrow arm, led by Rebekah Neumann the wife of WeWork chief Adam Neumann.

A closer look, however, and their might be cracks appearing, as we discussed in an article back in May titled ‘WeWork, WeLive, WeGrow but Will We Succeed in the Long Term?’. The reality is that in 2017 WeWork’s accumulated net losses of $934 million, according to Bloomberg who also suggested that the company currently owes approximately $18 billion in rent. Their general costs also rose almost threefold in 2017, although this is largely due to the administrative demand of their $4.4 billion investment by Softbank, which required a stock-buy-back from employees and early investors.

The truth is that without that huge investment from the Japanese venture capital fund WeWork’s story would be a very different one. The SoftBank Vision Fund is the brainchild of Masayoshi Son, an unusually risk-loving Japanese telecoms and Internet entrepreneur. As CEO of SoftBank, Son has been responsible for a variety of seemingly risky investments that have paid off to make the Vision Fund the world’s biggest growth fund by some distance at $100 billion. In fact, the next biggest private equity growth fund reaches just over $20 billion, whilst the next three biggest growth funds of venture capital firms add up to a mere $12bn combined.

The most famous of Son’s successes was the $20 million dollar investment made into a young marketplace platform called Alibaba. When the Chinese firm went public in 2014 it became the world’s biggest IPO, and SoftBank’s 28% stake in the firm is now worth $140bn. Earlier investments in Yahoo and more recent investments in chip-maker ARM and ride-sharing firms such as Uber have also been considered as strong successes. This does not add up to future success, however, and as the not-so-old Silicon valley saying goes, “start-ups perish more often from indigestion than starvation.”

“Putting $4.4bn into WeWork, a provider of shared workspaces, valuing it at $20bn, is another risky bet [from Son]. The firm leases office space, redesigns it to create a hip vibe and sublets it to startups, freelancers and some big firms. The worry is that WeWork is little more than a commercial-property company that is unjustifiably trading on a tech valuation and will soon be rumbled,” stated a recent article in The Economist.

We can consider one of their main competitors when assessing the viability of their valuation. Regus, now known as International Workplace Group (IWG), was established in 1989 and essentially do the same thing, yet they are struggling to reach a valuation 15% of WeWork’s. IWG has not been able to land a buyer willing to pay £2.8 billion after talks with a number of private equity talks in May, according to The Guardian.

IWG “said it had ended takeover talks with three private equity suitors, meaning it has had unsuccessful negotiations with six would-be bidders in short order. ‘None of the interested parties is currently capable of delivering an executable transaction at a recommendable price,’ IWG said. Its shares fell 20%,” The Guardian’s Nils Pratley wrote in an article titled ‘The lesson from non-bids for IWG is WeWork is overvalued’.

Whether there is another economic downturn on the cards in the coming years is debatable, and whether WeWork would survive it is another question up for discussion. There is, however, a growing concern over the firm’s ability to live up to its significant valuation and whether this new business model, strongly dependant on today’s start-up boom, will be able to evolve in time to weather a sharp decline in young companies entering the market. For now though, the age of start-ups is blossoming and WeWork is continuing to ride that wave on a surfboard made of debt.