The WeWork IPO

https://stratechery.com/2019/the-wework-ipo/

by denzil_correa • 7 years ago

246 194 7 years ago

braythwayt4• 7 years ago

Refreshingly, this article opens by stating the strong case FOR WeWork’s business, before getting down to asking whether this is a sound investment given the founder’s behaviour and the structure of the company.

But when it does turn its attention to that, it is as unflinching in its criticism as it was optimistic in its appraisal of the business opportunity:

Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.

mrtksn3• 7 years ago

Wouldn't recession make business real estate dirt cheap for WeWork too? Wouldn't it make flexible business spaces even more valuable when things are uncertain?

At first glance, maybe a recession can enable WeWork to acquire lot's of real estate under really favorable conditions and make it's premium when the recession is over. Don't you think so?

Also I'm under impression that the WeWork ysers are not the well funded companies but smaller companies and contractors and those people usually make money on their services, instead of relying on funding keeps flowing intil they exit.

bradstewart• 7 years ago

If they have a lot of capital available, maybe. But the likely scenario (my opinion): they're stuck with big multi-year leases to property owners, most of their existing customers do not renew their short-term leases because of the economy, and WeWork's existing cash reserves can't come close to covering the short fall until the market picks up.

EDIT: Grammar.

maxerickson• 7 years ago

The problem is that they are heavily leveraged at current prices.

Like if WeWork had a great business model after a massive recession, so would a competitor that didn't have an awful legacy portfolio to deal with.

jvagner2• 7 years ago

A recession now will make their already signed real estate too expensive, and that will happen when people dial back in discretionary expenses.

JOnAgain• 7 years ago

They’ve signed long term leases. Most of their customers can cancel on a months notice. So they will have shrinking revenue but fixed costs.

You’re right that it might reduce the cost of growth ...

ridaj• 7 years ago

A recession would be the best time to build out capacity because they could snap up long-term leases and maybe even building equity on the cheap, but they've been building now that the market is frothy and getting into long-term leases at possibly the worst time...

magashna• 7 years ago

Not if you're already locked into contracts at drastically higher prices. This seems like a startup that would actually be better to do in a recession instead of on the precipice of one

gigatexal2• 7 years ago

Yeah I was thinking the same. A recession could allow them to lock up really nice deals at cheap rates for a longer term and if they could then ride out the recession into the recovery the spread on the rates they could charge in recovery could be relatively good for them.

perseusprime11• 7 years ago

Apply Buffet's investment thesis to WeWork, one should stay away from this company because of the bad management team.

situational87• 7 years ago

The other possibility I don't see discussed often is they might simply be trying to become big and entrenched enough that bailouts of some variety (probably just endless tax breaks extracted at the local level) become mandatory for the business to survive.

If you entrench yourself deeply enough and people are looking at eviction and foreclosure and cancelling construction projects they could fight for this. Call it capitalism by hostage negotiation.

This actually seems to be what some larger companies like GE are planning on, (and Foxconn has already executed successfully) but it's bizarre to see this plan launched at the IPO stage.

JumpCrisscross• 7 years ago

they might simply be trying to become big and entrenched enough that bailouts of some variety

The implied source of such bailouts are the landlords, who may prefer to cut lease terms versus see e.g. 40% of their portfolio blow out simultaneously. (My personal view is yes, landlords will renegotiate terms. But they'll also demand an arm and a leg, likely in the form of senior debt and aggressive warrant coverage.)

somethoughts3• 7 years ago

The bull case is that it has the potential to become as valuable as Marriott which is about $43 Billion in market cap.

Marriott for the most part has transitioned mostly to an all digital company over the past two decades. The Marriott of today is primarily about hotel operations (i.e. branding, bookings/pricing/revpar/SEO, front desk, housekeeping, wifi, remodeling) and its loyalty rewards program and mobile phone app (BonVoy).

Much of its assets have been moved to a standalone REIT that trades under a different ticker. In a way similar to WeWork, Marriott effectively leases hotels from the REIT.

So in that sense, if WeWork can be considered analogous to Marriott, then in a hand wavy way the $47 Billion market cap valuation could somewhat make sense.

The bear case is that its not a well implemented corporate structure full of accounting traps and is actually a fraction of Marriott's valuation...

DebtDeflation• 7 years ago

The bull case is that it is as valuable as Marriott which is about $43 Billion in market cap.

Apart from the fact that Marriott has 11.5X as much annual revenue?

heymijo2• 7 years ago

Does the Marriott REIT actually own its properties or lease on long-time lines like WeWork?

edanm3• 7 years ago

The bull case is that it has the potential to become as valuable as Marriott which is about $43 Billion in market cap.

Um.. that's one bull case, but the article presents a much stronger case (namely, the one that WeWork itself is making). That is, that WeWork will do to offices what AWS did to servers - make it so the average company never buys physical servers, but rather outsources all of those operations to Amazon.

Analogously, WeWork is imagining a world in which companies never build offices - it's not their core competency, after all. Rather, most companies just get an office at a WeWork instead.

So their potential market is huge - they've only tapped a tiny tiny percentage of "all people who work at a desk".

perspective1• 7 years ago

Speaking to the business model, in my midwestern city a few coworking spaces popped up only to go broke within a few years. The only one to last is funded by VCs and mostly as their incubator. That VC one is thriving because the rents are heavily subsidized. If they ever rose prices, I doubt their membership would have any problems getting up and leaving as they don't have ties there by the nature of "coworking." It's the Uber/Lyft problem-- easy to switch between 2 competitors offering a commodity service. Good luck ever becoming more than marginally profitable. Heck, they're a real estate business, and they can't take advantage of deductions as effectively as LLCs or individuals can. As this realm matures, and they spend money and effort vetting markets, enterprising partnerships can swoop in offering localized services for cheaper.

Kaslyn• 7 years ago

Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.

Absolutely spot on

rrggrr• 7 years ago

IMHO: Great stock to own if/when its trading about 50% down from its IPO. I feel similarly concerning Slack.

goatinaboat2• 7 years ago

If WeWork is valued similarly to its real (no pun intended) sector - which is not tech - it is worth 5-10% of its supposed market cap.

human201903102• 7 years ago

Why? I don't see how being down 50% is some kind of vaccine against being down 100%.

quaquaqua1• 7 years ago

This is a really good comment. I remember when Blue Apron looked sensible at a 70% discount-- the stock is now at a 90% discount since its IPO.

ApolloFortyNine• 7 years ago

IMHO: Once Slack hits 50%, it must be on its way out. Slack is one of the most easily replaceable tech 'unicorns'. Your company could decide tomorrow to use one of the many competitors (or clones, since they all look just about the same) and the biggest downside for you would be having to resubscribe to channels. And that's if they don't build a migration tool for you.

They're not even that great at what they do, they have regular downtime.

ValentineC• 7 years ago

Slack is one of the most easily replaceable tech 'unicorns'. Your company could decide tomorrow to use one of the many competitors (or clones, since they all look just about the same) and the biggest downside for you would be having to resubscribe to channels.

As a tech community organiser, Slack's biggest appeal is that our members usually already have the desktop and mobile apps installed because of work, so it's relatively easy to onboard everyone by just asking them to add another workspace.

xwdv2• 7 years ago

Before the next recession hits, WeWork will be the first to die.

I hope someone from WeWork reads this, and knows it to be true.

ProAm• 7 years ago

Isn't this why all the companies are IPO'ing currently? Lyft and Uber hit the 10-year investment marker and were essentially forced to exit, but all the others I feel just see the writing on the wall and know they can't outlast a multi-year recession.

xwdv2• 7 years ago

Can’t say much about others but WeWork has been the product of a frothy bull market for a long time where anybody with a half decent startup could pick up generous venture capital.

But when that market tightens up, and we see less new startups coming out and with less money than before, those startups will take a hard sobering look at their finances and decide they simply can’t afford to blow money on shitty overpriced hipster co-working spaces, which unfortunately for WeWork is the only product they offer. WeWork will run into cashflow problems and that will be the end of it.

mbesto• 7 years ago

I hope someone from WeWork reads this, and knows it to be true.

You mean the people (mainly the CEO) who is cashing out massively as a result of the IPO?

127001brewer• 7 years ago

Matt Levin recently wrote about this too: https://www.bloomberg.com/opinion/articles/2019-08-19/we-loo...

m3at• 7 years ago

Relevant thread on WeWork as well by Scott Galloway, from a few days back: https://news.ycombinator.com/item?id=20724260

mrosett2• 7 years ago

I'm glad Ben laid out the bull case simply because nobody else is doing that. However, the analogy to AWS isn't compelling. First, running data centers is a much bigger challenge (technically, organizationally, and financially) than running your own office space. That's why AWS can maintain 30% gross margins and still be cheap at the price. By contrast, it's hard to imagine WeWork getting that kind of margin for repackaging leases (and adding beer and smugness into the mix.)

With the rise of serverless computing and similar technologies, there's also the question of utilization. Setting up your own server for an occasional request is expensive because you end up using some small percentage. of the capacity. AWS can make a lot of margin by pooling and smoothing demand for those occasional services. I don't think there's a good analogy in the office space category: maybe shared kitchens? Your average small business is much better at managing it utilization percentage for office space than for compute.

julianozen4• 7 years ago

While this is true, the ability to get space in a new city for exactly as many employees as needed, without having to have someone on the ground who knows local neighborhoods is pretty compelling. By going with WeWork a company has reasonable assurance that the location will be in a good place, have nice amenities for happy employees, and have the comfort knowing they are purchasing the right amount of space for their current needs and can expand or contract quickly. This makes expansion much quicker and lower risk.

Sure a company doesn’t need to offer beer or kombucha or be in central working districts, but not having to figure out all this info on their own when they just need a few rooms in a remote city is what companies are paying for. Like scalable sever infrastructure, the benefit isn’t the cost savings, so much as not having to hirer experts for things outside your business domain.

icebraining• 7 years ago

The alternative isn't having someone on the ground, it's hiring a reputable rentals agency that deals with international clients.

ghaff3• 7 years ago

I think that's all fair. And it's actually also perfectly consistent with an opinion that there will be more distributed/remote/WFH work in whole or in part and generally more flexible working arrangements. Because a company may need fewer seats under those conditions but it wants to be flexible about what seats and facilities it has.

I'm certainly not convinced WeWork will ultimately be a beneficiary of that--especially in a downturn that will lead to companies cutting back on expenses they don't really need to incur. But the basic idea makes sense (and of course there is a long record of companies like Regus in the space, albeit with a more traditional take).

kolbe3• 7 years ago

You're giving a perfectly compelling reason for someone to use WeWork. Clearly there are hundreds of thousands of people for whom WeWork offers a service that benefits them. But there is no reason for me to believe that the few companies that cannot afford to pay a local expert a few thousand dollars to help them with a move is going to lead to WeWork fulfilling its $1T/year vision.

JackFr2• 7 years ago

I agree that this is a refreshing take, and while I'm not fully sold on his argument I will play devil's advocate. The large part of any excess margin WeWork earns will not be necessarily for their operational expertise, but for the optionality for the customer which has real value.

With respect to utilization, there are some small businesses which are seasonal, or which have lumpy staffing requirements, for which we work might fit the bill.

v772• 7 years ago

I wonder if this is true. My one startup experience sure involved the management spending a lot of time scouting, negotiating for and renovating space rather than doing things that actually made the company successful.

Is the WeWork moat as big as AWS, probably not, but dealing with local real estate regulations and contractors in hundreds of jurisdictions around the world is not nothing.

chasely2• 7 years ago

I can definitely see the benefit for a team working remotely, which may (hopefully) become more common. I think WeWork still has a "local" business model: you rent out space at a specific location for defined periods of time.

If this switched to global, as I'm sure it is for enterprise accounts, I could see it being very valuable. If the variable cost of adding a desk in an office anywhere in the globe is, say, $500/seat that is so much easier than having to deal with setting up offices wherever you find talent.

That all being said, I have serious problems with the design of WeWork offices. Their horrible sound design means you· better hope you don't have an office neighbor that is making calls all day. The office I worked at had a private equity firm that rented out a corner of the building for a few of its remote employees. They then also rented the neighboring offices for those employees, which remained empty, so they could have privacy.

mrosett2• 7 years ago

I've seen the same phenomenon where CEOs spend way too much time thinking about the physical office space. I suspect, though, that they enjoy doing that - it plays pretty directly to vanity - and invest that time because they want to, not because they need to.

waylandsmithers2• 7 years ago

I don't think there's a good analogy in the office space category: maybe shared kitchens?

I worked for a startup that also rented out our extra space to other startups and there were a ton of benefits: conference rooms with tvs and teleconference hardware, phone booths, a very nice coffee maker and other kitchen appliances, shared outdoor space, nice furniture, copy machine, a receptionist... all things that most of the >10 person companies would not want to buy for themselves, but we all got to share because of the setup.

edanm3• 7 years ago

First, running data centers is a much bigger challenge [...] than running your own office space.
With the rise of serverless computing and similar technologies, there's also the question of utilization. [...] AWS can make a lot of margin by pooling and smoothing demand for those occasional services.

I disagree with both points. I'm a small business owner - I was also a small business owner in 2012. (Two different businesses). One of the biggest changes that have helped me out nowadays vs. back then, is the fact that WeWork exists.

In 2013, when we decided we wanted an office, we started to look for one. This was a super long process, and in our specific case we eventually gave up and stayed with a previous arrangement (unimportant to the story - that's usually not an option). The reason this was complicated was:

1. We needed to actually find a good location and a place that looks decent. This a) took time, and b) wasn't easy for a decent price.

2. Once renting a place, we'd need to decorate it / etc to make it actually usable - most places aren't immediately ready. This also includes furniture/etc, without which the space isn't useable.

3. We'd also need to take care of a lot of related payments and setup - internet, electricity, etc. Internet alone is annoying, as you have to setup office routers/etc.

4. To make everything really complicated - we had no idea how much space to get. We were a 10 person company, with plans to grow. But leases are for 2 years - do we get a space for 10? Of course not, if we grow we are in trouble. For 20? That means we're paying for a lot of excess space for a few years.

Compared to the above, setting up servers is much easier :) And as you can see in point #4, WeWork can smooth out capacity.

In contrast, last year my new company (2 people) moved to a WeWork. It took 3 days - we looked at 2 locations (also non WeWork), picked WeWork as it was the best combination of price vs. space provided, and moved in a week later. WE recently grew to 4 people - it took 3 conversations, and we found a new room in the same building that can house 4 people, we moved a week later.

rossdavidh• 7 years ago

So, this brings us to the possibility that WeWork is a symptom of a broader problem, which is that all that money which central banks have been printing since 2008 has mostly gone into doing stupid stuff. Eventually, the reality beneath the accounting always comes to the fore. In 2008, the reality that spending so much labor and resources on ever bigger houses for people who already had houses, didn't really produce much benefit (probably not even for the people living in the new houses).

The money glut printed since 2008 has mostly not gone into new productive capacity, it has gone into a lot of software-related hooey like Slack, WeWork, Uber, and various new social networks. I don't even think these have improved the target sectors that much, far less have they been worth the labour and other resources put into them.

It feels like another Fiscal Crisis is coming.

onlyrealcuzzo• 7 years ago

All that money did not go to fund "hooey" tech companies. $450B total has gone into VC since 2009. Stock buybacks in 2018 for U.S. companies alone was $1.1T.

Total global QE is $12.3T.

U.S. stock buybacks alone could be about $5.3T--or an order of magnitude more than global VC investment.

sol_remmy2• 7 years ago

I'm not sure why you're trying to draw a connection between stock buybacks and QE when there isn't one.

Stock buybacks are just tax-optimized dividends.

tjr225• 7 years ago

I feel like Slack is a little out of place there. It provides a pretty great platform for work collaboration.

I haven't used teams, but it's pretty great compared to say, Skype for Business, for instance.

HNcantBtrustd2• 7 years ago

I see the tech bubble as well.

It was aided in low education investors who are able to invest easier than ever.

I see technology as useful, but there are many companies that have not found a path to profit. this doesn't work.

streetcat12• 7 years ago

The money did not got anywhere. It probably stayed within the banking system.

Money is created only via debt, not by bank to bank lending, and not by printing.

Also, money is actually becoming cheaper (10 year yield is at its lowest) and we are probably entering a negative yield regime.

The underlying root cause is technology and demographic. I.e. the "glut" is due to low demand and not due to high supply. This is one of the reason that you see this big valuations.

waylandsmithers2• 7 years ago

I'd say WeWork and Uber provide real services that people want-- they're just not doing it profitably.

goatinaboat2• 7 years ago

2006 was the year that Amazon launched Amazon Web Services, a computer hardware business that leveraged the commoditization of hardware

I’m not sure that’s true. IIRC AWS started as a way to monetise the excess capacity that Amazon had to have on-hand anyway to cope with spikes.

sterwill• 7 years ago

That story doesn't appear to be true.

https://www.networkworld.com/article/2891297/the-myth-about-...

Illniyar• 7 years ago

As far as I understand it, amazon did not use AWS servers for their Amazon store infrastructure at all, at least not in the beginning. So it didn't actually "monetize excess capacity" rather it saw an opportunity and seized it with completely new investment.

cde-v2• 7 years ago

This guy just gets off on being contrarian. Don't ask him the color of the sky.

JackFr2• 7 years ago

Put another way, "I can't address his arguments."

cde-v2• 7 years ago

I'm not saying he doesn't do his research or argue well. I am saying all he does is write contrarian articles on every topic.

Multiplayer• 7 years ago

Having used wework for a couple of businesses, and left after 12 months or so, I have a slightly different view.

I think wework is a noisy, distracting and expensive pit stop on the way to remote work. The company turnover at the weworks we were at was remarkable, to me. I don’t know the root causes (business closing? Unsatisfied?) but it seemed very transient.

Our businesses moved to fully remote and enjoyed a significant rise in productivity each time.

Wework feels like a massive bet on open plan offices. They didn’t work for us.

Gene_Parmesan2• 7 years ago

Is that what the actual spaces of a WeWork are like? I've never done co-location/co-working spaces, only offices. But if they really are open planned, that sounds like a nightmare. Open office plans are bad enough when it's just your team. Sharing one with people from all sorts of different teams? No thank you. So much research out there showing how bad open plans are for productivity and employee happiness.

phlakaton• 7 years ago

It's a little worse than open space. Imagine that your office is a conference room with glass walls, and many/most people try to get work done in the lunch area.

That commons is a fun space, and easy to plop down in, but not super-conducive to productivity.

On the plus side, some vendors come along with free beignets if you'll just listen to their pitch.

aczerepinski2• 7 years ago

Agreed. If I could buy stock in “remote work” I’d do that way before buying stock in We.

unreal378• 7 years ago

Companies entering a new market will rent a spot for their "6 person team" at WeWork. And within a year they'll transition to a real office.

WeWork is indeed a pitstop. A pitstop to better offices for companies on the rise. Or a pitstop to working from home for people who think they need an office to work from but eventually don't.

morrbo2• 7 years ago

Is it different in the US? in the UK (London) it is literally like 25% (£1000+) more expensive than just renting a "normal" (nice) office. Couple that with the "noob" factor of having clients or whoever walking into a big "WeWork" labelled building, and i just simply don't get why people do this. The offices and facilities in most of them also look like glorified cafes. If it was dirt cheap i'd get it, but at the moment i'm just at a loss. What are you paying for?

garrickvanburen• 7 years ago

Yes - in my experience, coworking spaces are ‘until’ spaces: “until we get a real office”, “until we decide what we’re actually going to do”, “until we commit to being fully remote”

This was highlighted for me when a friend’s company’s office was damaged by a burst water main and they moved the entire team to a local co-working space....until their office was renovated.

Sure - you could make a bet coworking is like Bridal magazines - and count on a large continuous flow of demand by very short-term customers. Not the kind of bets I like.

unreal378• 7 years ago

I love that analogy. Coworking spaces are like bridal magazines. Something you only need for a year and then may never need again, lol.

mabbo• 7 years ago

The bull case for WeWork is really well laid out here. And what it tells me is that a well-run company competing with WeWork would (or will) destroy them.

Imagine a WeWork competitor that launches in a few years, at the bottom of the coming recession, that isn't doing sketchy financial things to make their founder wealthy. They could match or undercut WeWork's prices at a time when WeWork will probably be barely alive (if they make it that long) and still make money.

"AWS for Offices" is a great story, but it forgets that AWS has some serious competition now. Hardware as a service stopped being a disruption and became the norm with a competitive market. So too will "offices as a service" if WeWork's model is correct.

streetcat12• 7 years ago

I am not for or against wework. However, they do have first mover advantage for prime locations. I.e. it is not just cheaper rents.

Also, the founder dealing is not that relevant to the future of the company. Yes, he is a public persona, but for the day to day operations, I believe that there are operational personal that make the decisions.

southerndrift2• 7 years ago

What if WeWork is a bet on a future where no recession is going to happen? If the zero-interest money policy continues, then the amount of money increases and prices will slightly go up. No competitor can get the low rents that WeWork has secured.

human201903102• 7 years ago

If the thesis is that no recession will happen, and that money is free, why not just borrow money and dump it into an S&P 500 index fund and skip all the actual work?

mdorazio• 7 years ago

To be clear, the WeWork model is not new. Flexible office space in multiple locations has been a thing for decades from companies like Regis. I've used several of them without issue since before WeWork was even announced. What WeWork did was make it cool/startup-friendly and market the hell out of it while charging a premium that companies flush with investor cash can afford to pay out.

bryanlarsen2• 7 years ago

AFAICT, Uber, Lyft, AirBnB & WeWork's valuation can only be justified via the natural monopoly angle: network effects and all that.

Ben's AWS comparison is apt because I don't think many people consider AWS to be a natural monopoly. It has huge lock-in and a huge first-mover advantage, but is not a natural monopoly.

braythwayt4• 7 years ago

But what is the lock-in with WeWork? It’s not like you have to rewrite the way you conduct meetings if you move from WeWork to ACME.

With things like hotels and travel companies, there is a hidden lock in with their integration with enterprise back end systems.

If there is any lock in, that’s my first guess as to where it would be: Big companies would integrate with WeWork tightly, and there would a lot of friction in setting up another company account, similar to what happens when big companies have a process around becoming an approved vendor.

bryanlarsen2• 7 years ago

Isn't WeWork mostly used by small companies? Changing the address of a company's "headquarters" is a PITA when you have a million other things to do that actually progress you towards the goal of making customers happy.

Traster• 7 years ago

The thing that bothers me about the comparison between WeWork and AWS is that Amazon builds, owns and operates AWS data centres. Wework largely doesn't own the properties. I think that's a pretty important distinction.

Also, whilst a normal business can't really build a "AWS competitor for Chicago" the "A WeWork competitor for Chicago" seems like a much bigger threat. If the only way that WeWork can win those situations is by running at a loss in competitive markets and then monopoly pricing in other markets you've got two choices: Either they'll never make money because they'll always be loss leading, or they're facing being broken up by a regulator.

yuy9106163• 7 years ago

This is such a valid point. I have some similar thoughts. Kinda reminds me of the Uber case recently. Think everyone has collectively realized that the moat is not as strong, and must go 'city by city'. WeWork seems to be operating on the same shallow moat as Uber, rather than AWS

shiftpgdn• 7 years ago

WeWork generally does 15+ year deals on their leased space. What is the real lifespan of the average office building?

fastball2• 7 years ago

It must be a helluva lot longer than 15 years.

fastball2• 7 years ago

Exactly. I'm currently working from a co-working space that I like far more than any WeWork I've ever tried, and it is cheaper.

specialist• 7 years ago

Further, AWS had Amazon as its first customer. Eat your own dog food and all that.

I'm trying to think of a large business that could build (or did) an internal WeWork like division, and then offered that service to outside parties.

Huh. I guess that'd be a big white collar employer that did project centric work. Like a big consulting firm. Or an IT services unit, like Microsoft or Oracle.

Imagine Amazon bundling their own real estate, construction, facilities, space planning, and misc A/E/C functions as a service. For their own use. And then offering that service to outsiders.

That's what WeWork should look like.

I now predict that's exactly what Amazon will do.

Amazon will compete with WeWork and others in this space. With the advantage of themselves as their own first customer. And unlimited capital.

outworlder• 7 years ago

Further, AWS had Amazon as its first customer. Eat your own dog food and all that.

Is that true though? I've read many stories about internal Amazon teams not being allowed to use AWS and that, for the longest time, it was for customers only.

midnightclubbed2• 7 years ago

Totally agree.

AWS also operate out of a limited number of locations where they can optimize against their fixed costs (locations where they can negotiate power and bandwidth costs). Some of their running costs decrease when resources are not in use.

WeWork needs thousands of locations in order to be attractive to the target market and empty desks are pretty much the same cost as a full one (ongoing lease per sqft).

In San Diego there are just 2 WeWork locations, the closest being a 25 mile commute (through traffic hell) from my home. In order to be compelling they would need to be not much further than my local Starbucks.

amoitnga• 7 years ago

Comparison to Starbuck seems more reasonable

webwielder2• 7 years ago

The tech industry generally speaking is hardly a model for good corporate governance

I’d love to know what industry is!

docker_up2• 7 years ago

I lived through the dot-com bust. In Silicon Valley, there were scores of "technology parks" that were completely abandoned for years afterwards when the bust hit.

This is a company that can thrive in a Fed-fueled ZIRP economy that only goes up. If we don't dip into recession and keep growing for the next 15 years, this company will be genius.

But if there's ever a stumble in the road, it's also the type of company that immediately collapses on itself.

I also can't stress enough how detrimental Softbank has been and will be to Silicon Valley. They are dumping billions into companies that have no business being alive and if/when the econonmy collapses, it's going to be bad for the entire world. It's like preventing forest fires that clean up dead brush and instead sets up for a huge uncontrollable forest fire.

I'm personally trying to figure out how to protect myself, whether it's through buying US Treasuries, or gold or diversifying my cash in various currencies. But personally I don't think the fund is going to survive and there will be terrible repercussions from it.

petra• 7 years ago

What repercussions do you see for the fund not surviving ?

docker_up2• 7 years ago

The biggest repercussion I see is many, many companies goes belly up all at the same time, with lots of unemployment and a massive shock to the economy.

Companies going bankrupt happen all the time, but if their demise is prevented because they keep getting capital injections from Softbank, then once there's a systemic event so big that they can't get their next infusion, then they will all go bankrupt in one fell swoop with a bunch of companies going bankrupt, the companies providing those companies services going bankrupt, hundreds of thousands out of jobs, etc.

Imagine if WeWork went bankrupt right now. All their employees would be fired, and all the companies that provide services (catering, janitorial, Salesforce? AWS/GCP? etc) would layoff those employees. The bankruptcy trustees would be making a mad dash to try to sell their assets before the markets collapsed, depressing the markets.

This is obviously a worst case scenario but that's what basically happened during the dotcom bust.

aczerepinski2• 7 years ago

There’s also a possibility that the economy grows indefinitely, but remote work overtakes hour-plus commutes to city centers as the preferred working arrangement for startups.

ghaff3• 7 years ago

OTOH, you also have at least somewhat of a trend of those young urban professionals wanting to live near those city centers rather than commuting out from the suburbs. And those that do end up living in the city probably don't have nicely appointed offices in their apartments.

People's preferences vary of course but I imagine that, under those circumstances, a lot of those remote workers would like an office they could go into--at least some of the time.

orky56• 7 years ago

This is part of WeWork's expansion plan. People aren't going to switch fo full remote work overnight. As companies sprawl from the top 100 cities to the top 500, WeWork's additional locations will address this so that employee who commutes an hour can now just walk/drive 15 min to their nearest WeWork.

unreal378• 7 years ago

Yeah Softbank is awful. They'll be the ones leading a group of companies into the black hole. "Follow me!"

myth_buster• 7 years ago

https://en.wikipedia.org/wiki/Pied_Piper_of_Hamelin

WhompingWindows• 7 years ago

The comparison between WeWork and AWS the author attempts to make in the bull case is deeply flawed, IMO. He states the AWS story: commoditizing servers and allowing new customers to get in cheaply/quickly/easily.

Then he compares to that to We Work...well, don't many customers already have libraries, cafes, and their own homes to potentially work from? Did AWS customers have numerous server options to easily use in case they needed to save money? How are these comparable? Adding ping pong tables and surveillance tech to an open office work space is vastly less useful than AWS.

And corporate entities, surely WeWork will rely on those and not just contractors/freelancers/entrepeneurs, right? Well, corporations in a recession would likely lay workers off, so this dream WeWork has of gaining corporate partners seems unlikely in the next 5 years, if a recession is to hit as everyone claims. These corporate players will probably have excess office space of their own, never mind paying for more.

I appreciate attempting to present the bull case, but comparing WeWork to AWS is laughable.

sturgill5• 7 years ago

I thought his AWS comparison was more favorable than it seems you did. I remember launching a startup in 2009 and our head investor (who was a CFO at a bespoke insurance firm) was floored when he saw our financial docs and that we were able to make our infrastructure expenses OpEx instead of CapEx.

As AWS got its start making it easy for startups to get access to infrastructure, the bull case for WeWork is that startups choose that environment over signing a traditional lease. It’s not that a startup can’t work out of a coffee shop, just like we could have theoretically run our own email servers. But a physical location and address has advantages and WeWork opens that to more people with less friction than the pre-WeWork options.

But that’s the bull case. I’m not a financial analyst and I’m not your financial analyst so this isn’t financial advice, but my risk profile tells me to pass on this opportunity...

majewsky• 7 years ago

[He] was floored when he saw [...] that we were able to make our infrastructure expenses OpEx instead of CapEx.

Can someone ELI5 to me why spending a dollar on OpEx is better than spending a dollar on CapEx?

lonelappde• 7 years ago

AWS was a novel offering. WeWork appeals to dad followers and people so green that they don't know Regus and others exist. It might be attractive from a SV VC social perspective, but it's not meaningful as an business-model proposition. It's like opening a chain to compete with McD and Wendy's with the value prop "we have an efficient quick-servoce hexagonal burgers". The valuable part isn't new, and the new part isn't changing fundamentals.

vchak1• 7 years ago

I dont agree. Its actually the exact same thing. Before AWS you did not time share servers. Servers would be idle for long amounts of time if the capacity requirements were spiky. You have the same situation here, but for work areas/meeting capabilities. Going from a single tenant fully leased capability to a shared workspace model allows for much higher utilization of the underlying assets.

neom• 7 years ago

With a cloud provider you have a lot more behind the scenes control over how an asset is subscribed and provisioned. Now, If we squeeze everyone into a wework with the lights off...

unreal378• 7 years ago

How quickly people forget.

Before AWS, companies did IN FACT time share servers. The whole mainframe model was that IBM owned the server and you only rented a couple of hours on it.

But before WeWork, people also rented office space. WeWork is not the first company to offer rentable office space to workers. They're not breaking new ground here.

dnautics• 7 years ago

so this dream WeWork has of gaining corporate partners seems unlikely in the next 5 years, if a recession is to hit as everyone claims. These corporate players will probably have excess office space of their own, never mind paying for more.

What if the corporate partners are partners in flipping excess space in the case of a recession?

justicezyx• 7 years ago

Narrative similarity only works in hindsight. i.e., if A succeeded, and A looks similar to B, which was hugely successful. Then A is claimed to be always having the success factor because it is similar to B.

To predict the success by drawing similarity is always fool's game.

blueboo• 7 years ago

This is absolutely spot-on. AWS doesn’t replace email servers, as one commenter suggests. It offers compute infrastructure, a new need that grew alongside a truly novel business. Where’s the novelty of WeWork? Even now Wework has real competition, maybe not from IWG, but from myriad commercial business spaces that are just regearing for co-working — an immediate threat that further damages the AWS analogy.

xivzgrev• 7 years ago

I respect the hell out of this author but this article to me fell a little short of his usual rigor/insight.

Two points I would’ve like to see him analyze given the AWS metaphor

1) gross margins - this article reports 15-20% not 30% AWS https://news.crunchbase.com/news/gross-margins-wework-and-th...

Maybe AWS was able to improve GM over time and the author expects similar trend but he should explore this given the whole biz is built around variable income.

2) comparing the core competency between AWS and WeWork. He only gives this lip service and assumes the two are the same but I don’t agree.

I buy the argument that There’s core competencies in server management. In the old days servers were pretty basic - you buy, install, and turn on. Done. But then companies realized all that fixed supply was expensive so they made server supply dynamic, being able to dial up and down on short notice. That, plus integrations with lots of dev tools, necessitated a lot of software on top of the hardware. So now a company can invest precious engineers in managing that, or can use AWS or Google cloud, where the fixed costs of developing that software scale infinitely. Plus add on new requirements around security, etc and it’s a lot for a company to manage in house.

Compare this to office space. The fixed cost of lease is NOT scalable (only so many people you can fit in a building), and the core tasks of managing an office are...basically the same as they’ve always been. Sure you have some new design trends and IT requirements, but it’s slow moving. And who manages office space? HR and IT, which while valuable, aren’t forcing companies into trade offs between working on that or new product features / revenue driving opps.

I definitely agree wework is valuable for the flexibility. I just don’t really see mass adoption from large companies in the long term. Sure some large company may temporarily use them when they enter a new market but they will revert to managing themselves once they feel confident in signing their own lease.

yuy9106163• 7 years ago

Call it post-vacation hangover...Your point is very well made tho. Completely agree that office space != Cloud Service.

rwmj• 7 years ago

Regus (IWG) have been doing this for nearly 20 years. Apart from the slightly funkier interior decoration, what's the big difference?

yuy9106163• 7 years ago

Scale. # of locations.

gist• 7 years ago

Marketing and branding and some small coolness that matters. Real estate is emotional everyone already knows that when buying a house. You buy on emotion. Used to be the case in the past with autos also. (Not so much now though.)

Saying what's the difference (valid question not pointed toward you) with Wework vs. IWG is like saying 'why a Porsche vs. a Chevy' or even 'Why a 911 vs. a Corvette'. It's not explained by things other than emotion over a brand. I say this as someone who has purchased many 911's and wouldn't touch a Corvette with a 10 foot pole. Doesn't matter the price or the performance. It's all in my head but that head is pretty emotional about that type of purchase.

(One other thing is it's likely that the people makeup of a wework office is much different than that of a IWG office (I am making a guess here I don't know but suspect it is). As such it's the same as 'why starbucks vs. dunkin donuts' for coffee. Very generally the people sitting and getting coffee at starbucks appear physically different than the ones sitting in a dunkin donuts.

doppp• 7 years ago

Nothing.

Regus has 2.5 million customers but WeWork has only about over a quarter of a million. I live in a public housing estate in Singapore and there's a Regus Business Lounge in our estate's public library. We aren't even talking about the central business district, here.

I think WeWork has a lot more to catch up on in terms of scale and reach. Right now they're just building up hype like a tech company but really, they're just in the property space.

kevstev• 7 years ago

_Nothing_

This is the key "problem." WeWork is a boring real estate business that is trying to frame itself as some massive scale startup. Add in growth fueled by a ton of VC money (not earnings), tons of leverage, not even for owned property, but leases, some questionable deals with the CEO, insane hype and trying to redefine accounting metrics, and in the end you have a "boring" business dressed up in a pretty hype coat made of red flags.

unreal378• 7 years ago

WeWork leases entire office buildings. Regus only leases a floor of one.

So essentially, in far fewer locations, WeWork has more customers.

midnightclubbed2• 7 years ago

In SoCal it doesnt look like WeWork leases the entire building, just a few floors. I can't imagine there is a huge cost differential between leasing one floor of a building and leasing 3 floors (assuming the building is at least double that size). For the landlord there may be some advantages to not filling your building with one client.

chasely2• 7 years ago

If I remember correctly, Regus is "WeWork"ifying some of their real estate under the brand Spaces where you get the startup-y interiors. Under this brand they should be able to offer the same benefits as WeWork.

I will need to find coworking space in a couple months and will be looking at Spaces due to my less-than-optimal experience at WeWork.

oohaba• 7 years ago

I have experience with both WeWork facilities (via my former employer) and IWG Regus offices (via current startup), so I'll try to comment on the perceived differences.

The main factors for our startup choosing the Regus office in San Francisco were price and privacy.

Regus was vastly cheaper when we evaluated the two options. I'll have to check with the CEO for the exact numbers, but it ended up being several hundred dollars cheaper per month. Also, WeWork offices generally have glass windows, while Regus offices are still traditional closed rooms with doors.

In terms of other benefits: - meeting rooms tend to be easier to book at a Regus location, since they don't seem to be used much. - WeWork offers a bunch of consumable amenities: all types of milk, coffee, tea, kombucha, (previously) beer. Regus only has very limited options for coffee and tea. - WeWork spaces host social events frequently. Regus maybe once a month? Our building management tend to host more events than Regus, interestingly enough. - Noise level. Common areas in WeWork are similar to a coffee shop if there are lot of members in that location, whereas it's usually quiet in the kitchen & common areas on Regus floors.

This might read as an IWG support post, but I still miss the social aspect and youthful energy behind WeWork, as one of the sibling comments alluded to. But does it make sense for a seed-stage startup to pay for the cost differential? No.

dbuder• 7 years ago

I disagree that WeWork has a lack of competition, they are getting crushed in China and many local businesses are undercutting them. I'm shocked landlords sign leases with an entity they cannot sue.

wallflower• 7 years ago

The AWS analogy is flawed because there is a “lock in” to the ecosystem of AWS services outside EC2 once you start using those services. Terraform aside, it is not easy to divest of AWS once you invest in it for your infrastructure.

WeWork, on the other hand, has very little “lock in”. Not much to stop your business from moving out.

stephc_int133• 7 years ago

The growing trend or working remotely is clearly contrarian to this case.

As a startup co-founder and CEO, I've never found their offer compelling enough, way too pricey to put it bluntly.

And I really think that remote work is here to stay and grow.

not_a_moth• 7 years ago

Not exactly. It actually took me a while to figure out that WeWork even offers this, but for $45 a month you can have access to pretty much any common area at any WeWork, with a per-visit fee ($25-$50) and 2 credits per month.

In other words, I can travel and work remotely, and maybe once or twice a week check into a WeWork for a proper work space, unlimited coffee, and a bit of camaraderie and networking. For $100-$200 a month.

stephc_int133• 7 years ago

Ok, maybe that's just me, but I do not find that compelling either. I never really managed to work efficiently on a laptop or with a lot of strangers around.

If it was quiet as a library and equipped with real desktop screens (at least two) and good keyboards, my opinion might be different.

And if working on a laptop is your thing, you might as well do that from an actual library or a Starbuck...

734129837261• 7 years ago

I've started working in Mexico City as a European software engineer. My job offers 100% remote work and that allows me to work from anywhere. My home includes a girlfriend and her incidental home office, so I went searching for office space for myself, thinking it would be affordable in CDMX. There are like 7 WeWork locations and tons of other state of the art places to work. But for a private office sized to place one desk chair I'd be paying well over €500 euros per month. And it won't be a corner office, it'll be a glass-surrounded cubicle without a view.

So, instead, I went to look on AirBNB. I could rent a full apartment for about the same amount of money, except this would come with a view, with a couch, a shower, kitchen, weekly cleaning service, and all kinds of nice things.

But I kept on looking. There are numerous extremely luxurious buildings in the city where middle to high class people live. And a lot of them have rooms for rent. So I considered my own office room inside an apartment I share with 2 others. I can lock the door and I get 2 pets for free.

Best of all: The building is only 2 years old. They have a full sized gym on the 22nd floor, 7 swimming pools of which 2 olympic sized ones and 2 infinity pools, free saunas, free yoga and spinning lessons every day, a bowling alley and gaming hall, an indoor soccer field, et cetera.

So I took that. The building even comes with integrated office rooms and a full floor with couches and desks and tables and ping-pong tables and table-tennis tables and a grand view of the city. So it's not like they're against people working from there.

The problem with WeWork is that they aren't that interesting, not even in cities that are more expensive. The credits you get only allow you to switch locations until they run out, and then you need to purchase new ones for a lot of money.

They should really do a few things:

1. Look at the area they're in, at the very least be cheaper than AirBNB when it comes to offering a space to work from. 2. Once someone is a member, allow them to work from ALL WeWork locations (in the public areas). No credits cost, nothing. 3. On the website, per location, clearly show how crowded it is and how crowded it is expected to be that day.

They're way too expensive for what amounts to a crowded and noisy library. At least in a library people are expected to keep quiet so you can work. At WeWork I've been told you're to expect people coming up to you.

Side note: WeWork might be a great choice for companies who want to rent their first office space. That's not something I looked into.

jpalomaki• 7 years ago

Slack grew, because anybody from your organization could just acquire the tool. No need to talk with IT.

What if same thing hapoened for office space. BYOD and support for remoting allows people to work anywhere. If marketing finds the company HQ unattractive, they could just move elsewhere.

Does it actually make sense for different teams to be stuck in one location. Should they instead work close to customers or partners?

inflatableDodo• 7 years ago

"The obvious competitor is a company called IWG, with 3,306 locations and 445k workstations at the end of 2018. WeWork, in comparison, had 528 locations and 604k workstations as of June 30, 2019. Note the date mismatch — this isn’t a perfect comparison — but that only makes the point that these are two very different companies: WeWork had only 466k workstations at the end of 2018; a year earlier, when the Wall Street Journal pointed out that WeWork’s then-valuation was 5x IWG’s (it is now 13x), WeWork had a mere 150k, while IWG had 414k."

There are a ton of obvious competitors, they are not big, but they are everywhere, at least in the UK. Hotdesk rental has been a common SME thing for ages.

olivermarks• 7 years ago

https://www.bloomberg.com/news/articles/2019-08-20/wework-an...

nathanvanfleet• 7 years ago

Why does this article keep calling WeWork a software company??????

TheCoelacanth2• 7 years ago

Because there's no way to justify their ludicrous valuation if you admit that they are a real estate company.

AtlasBarfed• 7 years ago

AWS has data lock-in and offers fundamental capability-altering abilities to its customers. And it can't be replicated without a massive influx of capital to jumpstart (Microsoft, Google, etc).

WeWork has hundreds of competitors, including every building in a downtown with unused office space, to say nothing of better organized entities.

The WeWork IPO

Related Stories