December 8, 2021

Is real estate a simple fixed asset, or can it be something more like a service? That is the fundamental question WeWork is asking with their upcoming IPO. This New York-based provider of co-working spaces styles itself as more tech than real estate. Their innovative energy in a market close to Alliance’s has captured my attention. The CEO’s unusual leadership style makes them interesting to follow too.

The elephant in the office here is valuation. The only way to justify their target valuation of nearly $50 billion is if WeWork can show tremendous growth, along with a viable path to profitability. This is clearly in question, as WeWork posted losses of nearly $1 billion in the first half of 2019 — losses that continue to grow. A skeptical investor would point out that profitable growth is already priced into the IPO.

This approach is redefining the idea of office space away from a fixed asset and more towards a service that can be easily and flexibly scaled up and down to suit companies’ needs. They add additional value by redesigning offices to make them more attractive, adding amenities, and fostering professional communities.

WeWork’s value seems to come mainly from two places. First, they create optionality for tenants, who no longer need to make long term commitments to office space. Second, they can serve as hubs where small businesses and independent professionals can cross-pollinate, network, and build productive cultures.

The WeWork story is extra interesting for reasons unrelated to their innovative model. They’ve received huge investments from overseas funds that have backed other tech companies — like $10B from the Softbank Vision Fund. They also have an unusually opaque corporate structure and a strange CEO who positions himself as some kind of business guru. But using three different share classes to retain control, while raising billions of dollars and arranging for a very large pre-IPO cash-out for executives is questionable behavior.

It’s hard to know how much WeWork is really worth. Does their innovation mean they’re poised to scale up like a tech company? We’ll have answers in due time. Until then, WeWork is challenging old assumptions in a way that is good for the industry. I’ll be very interested to see how it all unfolds.

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