Earlier this month, WeWork (recently rebranded as The We Company), the coworking giant and darling of the tech startup sector posted its financial results for 2018. The company, which is privately owned, grew revenues more than twofold year-on-year to $1.8 billion; however, its net loss also swelled to $1.9 billion. Investors have poured billions of dollars into this much-lauded growth story and have yet to see positive cash flow. These latest losses suggest that they will have much longer to wait.
Who is really being disrupted?
WeWork is in many ways the Platonic ideal of a tech startup. A startup backed by billions in venture capital betting that its extreme growth will eventually morph into profitability that caters to other tech startups and continues to burn investor cash is perhaps the perfect poster child for the late-stage business cycle. As well as being a prominent example of the ‘growth at all cost’ flavour of company that has emerged over the last ten years, WeWork is particularly exposed to the risk that the startup bubble may burst.
Although it is an operator of commercial real estate, WeWork does not technically have tenants per se - it has members. Members can buy flexible monthly packages that give them access to office space in the company’s many locations around the globe. Members are willing (for now) to pay a premium for access to the building’s amenities and the ability to ‘rent’ office space without entering into a binding lease agreement.
Even though it is part of the tech zeitgeist, WeWork actually operates by a pretty old playbook. It does not actually own most of the buildings that it operates. Instead, the company leases them from landlords (including CEO and founder Adam Neumann) and collects money from its members who occupy the space. In the old days this was known as lease arbitrage; nowadays we are supposed to call it a ‘physical social network’.
What happens when the music stops?
The companies hosted by WeWork tend to be tech startups ,although larger firms also sometimes buy memberships to host contractors and other temporary workers. This means that in the event of an economic downturn, when capital tends to flow from risky investments (tech startups) to safer havens (government bonds), WeWork’s membership base will be severely eroded. Add to that the fact that WeWork already operates at a loss, and it is difficult to see how this model can be made robust in the long-term.
Alarm bells have already been sounded - back in January, Softbank’s Vision Fund (no stranger to speculative investments) slashed its planned $16 billion capital injection to WeWork to a paltry $2 billion. At a certain point, the shine will come off this particular rotting apple and investors will begin to question their involvement with this cash incinerator. When that happens, expect the fallout to be wide-reaching.
Disclosure: The author owns no stocks mentioned.
