50 Business The EconomistAugust 17th 2019
F
ar fromthe soulless corporate offices
of midtown Manhattan is a door in
Greenwich Village wedged between a row-
dy saloon and a burrito joint. The steady
stream of hipsters and fashionistas pass-
ing in front of it is punctuated by profes-
sionals in “business casual” outfits with
computer tote bags. Inside are stylish
workspaces offering fruit-infused water
and nitro coffee on tap. In one animated
meeting, participants are sitting on bean-
bags and the floor. That would never hap-
pen at his firm’s conservative headquar-
ters, says an executive at the technology
giant that has leased this co-working
space: “Younger workers want a more casu-
al place to work, and WeWork helps us with
recruitment and retention.”
The We Company (WeWork’s parent), a
nine-year-old privately held firm, is con-
troversial. The company’s chic co-working
spaces and its flamboyant boss, Adam Neu-
mann, clearly inspire passion among many
customers and workers. Japan’s SoftBank
has invested over $10bn in the firm, boost-
ing its valuation to $47bn. Equally passion-
ate are its critics, who argue that the firm is
worth nothing like that kind of money.
They point to iwg, which offers shared of-
fices under the Regus and Spaces brands
worldwide and which has a market capital-
isation of just $4.5bn (see chart).
So what is WeWork really worth? At last,
investors will get the chance to make up
their own minds. On August 14th the com-
pany unveiled its financial prospectus,
which is expected to lead to a public flota-
tion next month. The disclosures paint a
picture of a firm in transition from over-
hyped property startup to a maturing cor-
poration with diverse clients.
There are four main areas of concern
about WeWork’s viability. The first, and
most glaring, is its lack of profits. The firm
argues that this is explained by its huge in-
vestments needed to secure economies of
scale. It says that mature locations are prof-
itable. Revenues doubled during the first
half of 2019 to $1.5bn, from $764m during
the same period in 2018. Net losses rose
more modestly to $905m during the firsthalfofthisyear,upfrom $723m (though
one-off gains from related-party transac-
tions partly explain this).
The second concern is its obscene valu-
ation. Happily, the firm is diversifying its
funding sources. WeWork has reportedly
arranged for some $6bn in credit facilities
from ten banks, led by JPMorgan Chase,
that are tied to the successful completion
of its ipo. That gives Mr Neumann a strong
incentive to swallow his pride and lower
the asking price for its shares.
The third concern is whether a reces-
sion will push the company to bankruptcy.
This remains a risk, as the firm has taken
on $47bn in lease payments but has only
$4bn in committed future revenues fromcustomers. Here, it has some hedges. Its
leases are typically held in special-purpose
entities specific to one property (so a
blow-up insulates the parent firm). We-
Work has entered into revenue-sharing
leases with some landlords, which can of-
fer countercyclical relief. Because it does
its own construction, it can slow down the
build-out of new offices as it did during
London’s Brexit-induced downturn.
More important, some 40% of its mem-
berships are now held by big corporations,
up from 20% a couple of years ago. These
firms, which range from Amazon to hsbc,
have deeper pockets and typically take out
multi-year deals. Jeffrey Rayport of Har-
vard Business School argues that the firm’s
combination of low cost, flexibility and
thoughtfully curated culture is attractive to
big firms: “We have not reinvented office
space in 50 years, so WeWork is moving
into white space,” he says. “It does make
workers happier and more productive.”
The final big worry is questionable cor-
porate governance. WeWork will issue
multiple classes of shares that give Mr Neu-
mann control with a minority stake. He has
a complex relationship with the firm be-
cause he leases space to it in buildings he
owns, a practice it promises to end. His
wife is a “strategic thought partner” and
runs an unpromising education arm.
Charles Elson, a governance expert at the
University of Delaware, warns, “If you start
with this culture, you can’t get rid of it.”
Mr Neumann’s claim that his firm will
“elevate the world’s consciousness” is
plainly silly. Even so, it is wrong to equate
WeWork with Regus. cbre, a property-
management firm, estimates that the flex-
ible-work niche has experienced “meteoric
growth” of 25% in America’s top ten mar-
kets in 2018, with similar figures in big cit-
ies worldwide. Mr Rayport believes that the
firm’s business-model innovations have
dramatically enlarged the total addressable
market. Still, investing in WeWork remains
an act of faith. 7NEW YORK
WeWork, a much-ballyhooed property firm, unveils its prospectusWeWork’s IPORisky business
*EndJune 2019 †Latest ‡EstimateThe officeSources:Bloomberg;companyreportsWorkstations
’000Revenue
$bnNet loss
$bnFree cashflow
$bn2016 180-0.5-1.0-1.5-2.0
1820160-0.5-1.0-1.5-2.0
1820162.01.51.00.50
1820166004503001500Shared workspace providers WeWork
2018,$bnWeWork IWGNet profit/
lossRevenueTotal assets*
11.14.50.1Market
capitalisation†271.847‡-1.93.4Mirrors. And smoke?Corrections:In “Windfall” ( July 27th) we should
have said that America generated 4.2bn
megawatt-hours, not kilowatt-hours, of electricity in- And KKRannounced its takeover of heidelpay
on August 4th, not July 4th (“Locust in Lederhosen”,
August 10th). We apologise for mixing up
magnitudes and months.