Why WeWork Should Not Go Public
Recently, there have been whispers the co-working giant is considering an IPO. And it’s not a far-fetched idea considering investors gave it a $16B valuation in March after the company raised $430M during a round of funding. In fact, WeWork has managed to raise more than $1.4B in the last six years to fund its rapid growth.
But Harvard economist and real estate lecturer Ray Torto tells Bisnow that may not be enough for the average investor. Long-term success as a public company isn't just about insiders understanding and financially supporting a firm. Eventually, it becomes about the average American investor.
“As a landlord I’d be a little more comfortable with the fact that they have some capital in their pocketbook. But as an investor I’m not so sure I’d pay a high price for this," he tells us. "Though they are certainly working on a topic that is current and on the leading edge of office space."
Recently, the company has been losing momentum, pulling out of plans to open additional office space in London—its second-largest market—in addition to cutting jobs and freezing hiring efforts. Last month it announced plans to cut 7% of its workforce.
Successful IPO Looks Bleak
Tim Keating, the founder of investment advisement firm Keating Wealth Management, tells Bisnow WeWork is lacking two key elements needed for a successful IPO—a network effect and barriers to entry.
Giant companies like Facebook or Uber, for example, have the network effect—meaning people will use their services just because everyone else is. This is not the case with WeWork.
The company also faces ample competition in the office sector in that there are zero barriers to entry. Any company can conceivably lease a floor and cut it up into smaller offices of shared workspace. In NY alone, there are more than 180 co-working locations today, while back in 2009 there were only 25—and WeWork controls only half the market.
“In my opinion there are none of (those benefits) available to WeWork, and if you think about it, what is it? It’s really office space,” Tim tells us. "My argument is that there are no barriers to entry and no network effect; no inherent advantage to using WeWork versus anything else.”
Getting Its Start
It hasn’t always been doom and gloom for the crowd favorite. Its rise to fame started back in 2010 when the co-working concept—founded by Adam Neumann (pictured) and Miguel McKelvey—caught the attention of real estate mogul Mort Zuckerman, the 77-year-old chairman of Boston Properties worth $2.6B.
From there investors flowed in, many of whom were mesmerized by the company’s unique shared-working culture and innovative amenities—like craft beer on tap and ping pong tables—that appealed to career-driven Millennials and young startups companies.
The company’s model was simple—take out cut-rate leases on a few floors of an office building, chop it into smaller parcels and charge a monthly rate to small businesses and individuals for membership. The end result transformed buildings into creative shared office space for entrepreneurs and small companies.
WeWork opened its doors to NYC in April 2011, and by 2015 it had become the most valuable office startup in the city, having raised $970M with a $10B valuation—making it the 11th-most-valuable startup in the world.
Lawsuits And Other Woes
The company disrupting the traditional office space sector has some trouble of its own. WeWork is facing several lawsuits, one in which an employee is alleging labor law violations that could make it all the way to the Supreme Court. Not to mention a suit the company is bringing against a former employee for allegedly disclosing financial shortcomings to Bloomberg News that was for internal purposes only.
After filing the complaint with the New York Supreme Court, Adam released a statement to employees about the stolen electronic materials, and how “there may be stories in the press that include information from the stolen materials or refers to the legal actions we are taking.”
Bloomberg last week wrote about WeWork's financial troubles. WeWork recently hacked its 2016 profit forecasts by 78%, in addition to cutting revenue forecasts by 14% and reporting an expected 63% in negative cash flow.
With delayed building openings and higher-than-expected construction costs, Adam said the company had to get its finances in order. He implored employees in an internal email to reverse their "spending culture," telling them little things like turning off lights at 2am could help the company reach its fullest financial potential.
Still, Adam emailed Bloomberg last week stating that the “business is performing incredibly well and is stronger than ever.”
For a lot of these reasons, Tim is not confident a WeWork IPO would do well.
"It's a crowded marketplace, and (WeWork's) financials, according to Bloomberg, appear to be significantly reduced,” Tim tells us. “All of which says it may be an interesting company, but I don’t think it will fly at a $16B valuation or anywhere close.”