As We Co, the parent of flexible office provider WeWork, prepares to now IPO later this year after postponing its September launch, many in the property industry are still struggling to define WeWork: is it a competitor, a client or just a hype?
Let’s first address the postponement for which there appear to be two main reasons. Firstly, the disappointing performance of other tech IPOs (think Uber/Lyft) which have adversely affected We Co’s pricing prospects. The second reason is the conflict of interest between We Co needing the IPO proceeds to keep growing and We Co’s largest investor Vision Fund avoiding taking a loss on its investment, just as it is raising its second fund. Nevertheless, let’s assume they find a route out of this and can relaunch later this year.
Here are five points to help you working out WeWork.
(I) if you are old enough to remember Netscape and Lotus 123, you will know that inventions can outlive their inventors, i.e. even if WeWork fails, its business model could survive.
(II) like what McDonald’s did to burger joints, what WeWork has done is not new, but it also has standardised processes, scaled globally at a relentless pace and created a slick modern branding.
(III) unlike traditional office landlords, WeWork did something different: it listened to its customers and created a product that suited their needs which allowed it to ask a higher price for it. In marketing this is called a pull strategy which contrasts with the push strategy of mass-selling identical commodity products often competing on price alone. Hence, WeWork is selling a service which allows corporates to improve productivity by offering workstations in multiple flexible locations rather than helping the corporate services department reducing its fixed costs by 10% every year.
(IV) its market segmentation is smart. WeWork focuses on growth SMEs and business units within larger entities which need flexibility on cost structures in order to facilitate their uncertain growth paths. In our modern network society this customer group appears to be a growth sector.
(V) WeWork’s model is anchored on technology which measures and optimises the use of space. WeWork believes the technology is scalable and it can use its results throughout its global network as well as sell it directly to corporate office users and do to corporate real estate management what Salesforce did to corporate CRM. This idea of course, if substantiated, would justify its tech status and valuation.
Hence the analysts covering We Co are not so much questioning the business model (as many in the property industry do), but are focusing on two elements: (1) the mature stabilised assets’ cash flow profile and resilience and (2) WeWork’s access to future funding, its financial discipline and governance to sustain its rapid cash-burning growth path.
In 2000, amazon.com as it was then known, was valued at $23bn, c. 17x sales. Today its market cap tops $900bn. No wonder Adam Neumann refers to Amazon as his example for We Co. Like WeWork, Amazon was burning cash to finance fast growth. It could do so because its stabilised mature operations were cash flow positive.