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Report: SoftBank Could Be Making a Massive Bet on WeWork

By NexChange
Financial Services

SoftBank is in talks to make an investment in WeWork totaling between $15 and $20 billion, giving it a majority stake in the New York-based shared office space provider, the Wall Street Journal reports.

The investment would likely be coming out of SoftBank’s $92-billion Vision Fund, according to the Journal. In addition to SoftBank, the Vision Fund is mostly backed by Saudi Arabia and Abu Dhabi wealth funds.

SoftBank already owns about 20% of WeWork, having invested $4.4 billion in the startup last year that valued the company at $20 billion. But if this latest deal goes through – and the Journal notes that discussions right now “are fluid and there is no guarantee there will be a deal” – it would be a massive bet by SoftBank on the eight-year old WeWork.

If a deal is completed, it would be one of the largest and more momentous deals of the past decade’s startup boom. SoftBank in January completed the biggest investment in a venture-backed startup, paying $7.7 billion for a 15% stake in Uber Technologies Inc. More than 160 private companies backed by venture capital have valuations of more than $1 billion, up from just a handful in 2010.

In eight years, New York-based WeWork has grown from a single office in Lower Manhattan to a workspace giant that rents more than 265,000 desks in 287 buildings, as of midyear. WeWork now occupies more Manhattan office space than any other company, renting 5.3 million feet there, according to real-estate-services firm Cushman & Wakefield.

WeWork, which was founded in New York City in 2010 by Adam Neumann and Miguel McKelvey, is among a group of startups that aren’t actually tech companies – WeWork leases office space – but operates as though it were a technology company. Thus, the company’s valuation has drawn skepticism from some who see it as being driven by its identification as a quasi-tech company instead of a real estate firm.

Sarah Halzack and Shira Ovide, writing for Bloomberg‘s Gadfly blog, zeroed in on WeWork’s purchase last year 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 wrote

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.

The Journal also points to this seeming disconnect between WeWork’s valuation and its actual business.

WeWork’s valuation has long baffled real estate landlords as well as veterans of the serviced-office business, which offers a similar product—rental offices—though generally with a less-hip vibe. The leading company in that business, IWG PLC, had nearly twice as many desks for rent as WeWork as of June, but roughly one-fifth its valuation.

WeWork has also been racking up losses amid its investment in rapid growth, and recently those losses have begun to accelerate. In the first six months of the year, it posted losses of $723 million, wider than $154 million in the same period last year, according to numbers it provided to debt investors. In the same period, revenue more than doubled to $763 million.

Meanwhile, Recode notes that if SoftBank were to invest $20 billion in WeWork, the startup would account for a quarter of the Vision Fund. SoftBank is already “heavily, heavily dependent on WeWork’s success — a business whose valuation rides as much on its product as its millennial-friendly rebranding of office space,” Recode reports.

Financial terms of the deal still being negotiated have been described as tense. But if SoftBank were to sink as much as $20 billion more into the company at a valuation of around $40 billion, then there has to be a belief that public market investors could envision WeWork as worth a multiple of that. Is WeWork a $100 billion company?

The Journal reported on WeWork’s surging valuation last year, looking 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.” The headline for the piece was telling: WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust.

Photo: WeWork

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