WeWork Valuation: Phase I

Bull Hypothesis

WeWork is a hybrid of AWS and Marriott. Because WeWork leverages technology and scale to lower costs, increase flexibility, and improve the office experience, companies across the world will outsource office creation and management to WeWork. Co-working is merely the springboard.

Bear Hypothesis

WeWork is an overhyped-Regus with a frail capital structure, no scale benefits, no network effects, and dangerous liabilities. It will likely collapse during a recession.

Bias Tests

Although bias is unavoidable, many people unfortunately allow preconceived notions to compromise their WeWork judgments both positively and negatively.

These two questions help expose bias. If someone offers an opinion yet cannot answer fundamental questions, the opinion most likely reflects bias and not insight. Beware informed, but biased, opinions.

1. Is WeWork selling lemonade for a loss, or opening too many stands?
2. Why is the WeWork business model riskier than ones employed by Regus, Marriott, CBRE, and other companies that buy long-term leases while selling them short-term?

Research Questions

What matters to customers?

1. Besides cost, flexibility, and geographic choice, what else matters to large companies like IBM (1,000+ employees)? How about medium companies (100–1,000)? Small companies (2–99)? Individuals?
2. What is the cost-benefit of managing office space directly instead of outsourcing?
3. Why don’t companies use Regus and other co-working options more often?

What are the unit economics?

1. For large companies like IBM, what is the cost per employee and per square foot to open and manage an office, including amenities and maintenance? How about small and medium companies? What are the time costs?
2. What does WeWork charge each of these cohorts (i.e., large companies, medium companies, small companies, individuals)?
3. For the average WeWork location, what occupancy rate and how many members are required to break even?
4. For the average location, what is the WeWork spread? That is, what is the fair market price, the negotiated cost for WeWork, and the amount earned by WeWork (all answers per square foot)?
5. Beyond renting office space, how much revenue can WeWork capture per member?

What is the market size?

1. Knowledge workers need corporate offices. In 2012, McKinsey estimated 230mn knowledge workers. In 2019, LinkedIn boasted over 645mn users. How many knowledge workers are there?
2. How many workers don’t need to rent office space? For instance, Google owns many properties and doesn’t need to rent space for most employees. Freelancers may prefer working at home.

For illustration purposes, if research reveals there are 500mn knowledge workers and only 20% need to rent, this yields a market size of 100mn users.

How does WeWork differ from Regus, Marriott, and hotel operators?

1. The WeWork model of buying long-term leases and selling short-term leases is similar to Regus, CBRE, Marriott, and hotel operators. What are the differences and unique risks, particularly around the risks of long-term leases? For instance, is Marriott more insulated from risk because the landlord is actually a Marriott entity?
2. How do the business model and unit economics for WeWork differ from Regus, CBRE, and other competitors?

What happens during a recession?

1. Assuming Regus, CBRE, and Marriott are appropriate comps, how have those companies performed during recessions? What was the impact on occupancy rate, revenue/user, revenue/square foot, and profit/square foot?
2. How much flexibility does WeWork have regarding leases and liabilities? In particular, how much control does it have over cash flows to avoid disaster during a recession?
3. Why is WeWork different from other startups who failed in this space?

How does WeWork use technology?

All questions should benchmark WeWork against direct competitors and the internal teams of large companies.

1. How does WeWork use technology to find tenants and maximize occupancy rates?
2. How does WeWork use technology to find and secure desirable locations?
3. How does WeWork use technology to maximize revenue per square foot? For instance, how does it use technology to subdivide floors into multiple offices?
4. How long does it take for WeWork to turn empty space into office space?
5. How does WeWork use technology to repair and maintain facilities?

What are the fair market comps?

Debating tech vs. non-tech is a distraction from what matters. What matters is fast growth and strong moats.

Torrid growth is undeniable. In 2018, WeWork grew revenue over 100% compared to the previous year. For contrast, Marriott grew sales about 1% in 2018.

The argument hinges on WeWork’s defensibility and pricing power.

Choosing the appropriate multiple requires comparing WeWork’s growth and moats to alternative equity options. For instance, Salesforce has slower growth but arguably stronger moats while Marriott may have stronger moats but zero growth. What’s the right multiple? There’s no scientific answer, only estimates of where the market one day converges.

Price/sales ratios:

• CBRE Group: 0.80
• Regus: 1.37
• Marriott: 2.06
• Hilton: 2.98
• Starbucks: 4.20
• Uber: 4.55
• Vornado Realty Trust: 5.75
• Boston Properties: 7.03
• Salesforce: 9.24
• Slack: 27.20
• Zoom: 49.92

How is WeWork performing?

1. What is the lifetime value, acquisition cost, and retention rate for WeWork members among individuals, small companies, medium companies, and large companies? How has this changed over time?
2. What is the member mix among these cohorts? How has this changed over time?
3. How are the most mature locations performing, and do new locations follow a similar performance pattern?

Who is the right CEO?

1. Cashing out $700mm seems like a red flag. What percentage of equity does this represent for the founder? Is cashing this much out normal for large IPOs? By comparison, how much did Zuckerberg, Hastings, and Bezos cash out at IPO?
2. Buying properties with a separate entity and leasing them to the operating company is the same model adopted by Marriott. This alone is not suspicious and could even justify cashing out exorbitant sums. Was SoftBank aware of this arrangement? Were the leases above board and careful to avoid inappropriately enriching the founder?
3. Co-working is merely the springboard. The macro play is becoming the best entity in the world at creating and managing offices, ultimately convincing companies to outsource office management to WeWork. This will require creating new products and inventing new processes to expand the market. Is the founder the right person to spearhead this transition?

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