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Should WeWork Really Be One of the Most Valuable Startups in the World?

By NexChange
Venture Capital

With a valuation of more than $20 billion, the New York-based office space provider WeWork is one of the richest startups in the world, having just secured another $4.4 billion in August from SoftBank’s Vision Fund.

But as WeWork’s valuation reaches astronomical levels, it brings with it increased scrutiny and one inevitable question: Is this really a $20-billion company? If you believe two recent media reports, the answer would be no.

The Wall Street Journal delved into WeWork’s surging valuation with a headline – WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust – that makes it pretty clear a lot of people the Journal‘s Eliot Brown talked to for his article are calling bullshit on the high-flying startup. At the crux of Brown’s piece is a look at how WeWork – and a number of other non-tech startups – have been able to build valuation levels normally reserved for tech companies by appealing to the buzzy marketing angles that Silicon Valley investors love, such as positioning itself as “a startup that will disrupt its industry” and/or “appeal to millennials.”

WeWork was founded in New York City in 2010 by Adam Neumann and Miguel McKelvey, but it’s Neumann, the “charismatic” chief executive of the company, that appears to be the one driving the company’s momentum among investors. WeWork’s valuation is currently about 20 times its projected annualized revenue.

Neumann, who declined to be interviewed by the Journal, has said that WeWork is “neither a real-estate company nor a tech company,” but nonetheless has adopted some of descriptors favored by Silicon Valley.

He talks of “space as a service,” a play on the concept of software as a service, in which a provider makes software available to users as they need it over the internet. He calls the company a “platform”—like a computer operating system—from which it can sell other services such as insurance or software.

Mr. Neumann told WeWork’s PR representatives to push back against characterizations in the media of WeWork as a real-estate company and instead describe WeWork as a lifestyle or community-focused company, according to people familiar with the instructions.

However, some people see all of this as merely decoration.

Others in the real-estate industry and some Silicon Valley investors say the company’s well-crafted image belies the mundane nature of its business. WeWork takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month.

But Neumann’s positioning of WeWork as something either in between tech and real estate or none of the above has paid off.

“If you had positioned this as a real-estate company, it wouldn’t be worth this,” said Barry Sternlicht, who runs Starwood Capital Group LLC, with more than $50 billion of real-estate assets under management. Mr. Neumann “dressed it up and made it into a community, and that turned it into a tech play.”

Venture capitalists and mutual funds have poured billions into companies claiming they can upend traditional industries whether through the use of technology or their unique appeal to millennials. Startups in the business of selling meal kits, mattresses and razors have received tech-like valuations based on the idea their rapid growth can continue for years.

Meanwhile, Sarah Halzack and Shira Ovide, writing for Bloomberg‘s Gadfly blog, zeroed in on WeWork’s recent purchase of the iconic 676,000-square-foot Lord & Taylor building on Fifth Avenue in Manhattan for $850 million from Hudson’s Bay, the building’s owner. “[It’s] hard not to see its real-estate splurge as evidence we have hit peak silly times for startups,” Halzack and Ovide write.

WeWork is among the most head-scratching of the current generation of richly valued not-quite-technology startups. The company squirms at being described as a real-estate company, but it is a real-estate company valued like a technology company at about $20 billion, or roughly 20 times its projected annualized revenue. WeWork’s CEO recently said the company’s valuation is “much more based on our energy and spirituality than it is on a multiple of revenue.” Okay.

Halzack and Ovide add that WeWork “is presumably burning cash, as all modern tech startups seem to believe they are legally required to do,” but are using their investor’s money on everything from pricey real estate to acquiring a software coding school and starting fitness classes for its tenants.

But it’s also hard not to wonder if the easy access to investor cash for many young, technology(-ish) companies is now distorting the value of assets in the physical world. In other words, frothy valuations may not necessarily stay contained in the magical forest of startup unicorns.

Citing WeWork’s own data, the Journal notes that WeWork’s the occupancy of its “offices open a year have fallen to 90% from 97% last year, according to the company.”

Photo: WeWork

 

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