Tensions have risen to a peak for WeWork, a co-working/office space sharing company that just recently delayed its IPO. Its valuation has been cut from $47B to approximately $10B, its CEO Adam Neumann has stepped down (along with his wife who is a co-founder of the company), and to make matters worse, the company has since reported it will stop leasing new office space with property owners nationwide. Though seen as an effort to lower operating costs for WeWork, this decision might have lasting ripple effects on the nation’s real estate market. The real question, though, is how we got to this point. How does the fastest growing startup in history wake up one morning to see itself worth half of what it was the day before, not once, but twice? I posit this is because Neumann is an incredibly good salesman, and it took the rest of us too long to separate the fantasy of WeWork from reality.
WeWork’s underlying business model is not that complex – initiate long-term lease agreements for large office spaces in highly populated areas, redesign the spaces with a millenial flair, then sublease the office space at a premium to short-term tenants, typically an entrepreneur/freelancer or a newly incorporated startup. WeWork isn’t the only player in the co-working space either; Knotel and Regus are two large companies that do the same thing. So with startup valuations reaching record highs, why is WeWork valued like a tech company rather than a real estate company? Because Neumann frames it that way. In a video called “How WeWork Finds Real Estate for Office Spaces,” Chief Development Officer Granit Gjonbalaj says:
“Stargate is a software that we have developed in house to identify markets and identify specific locations. We gather data about the buildings themselves, the neighborhoods and markets the cities are in. If you drop a pin, within a ten minute walk, we can see what kind of businesses are in the area. . . From the time that we select the real estate until we open it to our members, it takes 6 to 9 months. If you compare that to the outside industry, it takes a year and a half to two years. It absolutely helps us become innovative and create the communities we want to create.”Though the company has created proprietary software to identify new expansion opportunities, this is not something new to the real estate market. The underwriting process in a real estate investment firm is quite similar – it’s a data oriented approach to finding a good investment opportunity. When we notice the similarities, WeWork looks anything but innovative; instead it looks like a company started by a smart guy who can pitch his idea well to investors. While Neumann and the WeWork team have created their own technology for finding optimal locations for their workspaces, the company’s high valuation, I believe, is more a result of the company’s revenue growth and Neumann’s salesmanship to top-tier investors like SoftBank, the largest technology investor in the world. That said, a good salesman is not always a good CEO. While brand image is important, both to get customers to buy your product/service and to get investors to invest in your company, a company’s brand is not a solid enough reason for billions of dollars to be poured in a company that showed a Net Loss of almost $1B. Revenue growth is not the same as growth in profit – due to the deals WeWork signs, it commits billions of dollars to 15+ year lease agreements when only 1% of their committed leases get subleased by their customers. This leads WeWork to spend boat loads of cash on deals with which they have no certainty will realize true returns for the company – not to mention the fact that Neumann, while selling the story of WeWork to investors, was building a company for himself rather than the end customers, giving himself 20x the voting rights of a common stockholder, buying the “We” trademark from himself (putting millions of dollars into his own pocket), and persuading investors that this company was not just a coworking space, but a global brand that looks to branch into education, short term apartment rentals, and more. His exuberance was palpable, and investors hopped on the hype train.
Don’t get me wrong – one of the main aspects of raising venture capital for your startup is, in fact, the story you tell investors. If you cannot make someone else see the value in your startup idea, you will get no funding. You must be able to sell the idea to a point where someone will be willing to give you thousands, if not millions (if not billions, like in WeWork’s case), of dollars to build your company. The problem with this arises when the CEO of a company stops focusing on one of the core components of the business (cash flow) and becomes increasingly focused on the valuation of his business, an almost arbitrary value investors and founders alike argue about while negotiating venture capital deals. WeWork has yet again proven the idea that valuations in the startup space are astronomically high for little reason other than CEOs being great sales people. Had he focused on building a sustainable business rather than personal ego inflation, I truly believe Adam Neumann could have built a company to stand the test of time; however, with negative press and criticism surrounding a postponed IPO, the task of rebuilding WeWork’s positive reputation may be more difficult than the company once thought.
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