The core product of WeWork is real estate space for small businesses, entrepreneurs and freelancers. For a monthly fee ranging from $45 to $450, WeWork provides office space, furniture, conference rooms, and various workplace amenities. Enter any of its 44 locations in the US and it’s pretty clear which type of tenant they are focused on acquiring. Amenities provided include large, open common areas with a variety of sitting options and cappuccino machines; arcade machines and ping pong tables; and outdoor patios and showers. Members can opt for a “traditional” cubicle office or a work station on an open floor with other tenants. With over 25K members across eight cities and three countries, WeWork is the hottest coworking space for the tech generation.
But as hip as its work space and furniture may be, a company with a typical office leasing model would be hard pressed to raise over $1 billion and get a valuation of $10 billion, which WeWork did in June 2015. At such a high valuation, WeWork and its investors are clearly betting on the existence of strong network effects in coworking and on the company’s ability to effectively harness those network effects.
Direct network effects
The more tenants that rent space in a WeWork location, the greater the opportunities become for networking and meeting like-minded people. Small and medium-sized businesses are strapped for relationships, information and time. WeWork by the very nature of coworking provides a centralized pool of talent to alleviate these resource shortfalls, but it also works hard to increase the likelihood of their tenants harvesting this value by hosting frequent happy hours, inviting investors and tech professionals to hold informational talks, and providing members with an app with a directory and communication tool to facilitate interaction between tenants. Every location has a community manager to ensure interaction between its tenants, and a tenancy at WeWork is framed as a “membership”. Aside from the exclusive nature that in itself may of some worth to its tenants, the value of the mental and emotional support that can be derived from the community cannot be overlooked given the prevalence of mental health issues in entrepreneurs. WeWork’s dedication to community-building (and, thus, brand-building for itself) is best seen in its annual Summer Camp, a three-day music and networking conference in upstate New York.
Indirect network effects
WeWork has partnered with over 150 businesses, including Amazon Web Services, Zipcar, AT&T, etc. to provide benefits and discounts for its members. In May, WeWork announced a partnership with Chase to offer members discounted rates and premium services. Access to discounted health care and HR solutions are likely the most beneficial to small businesses. In such a way, WeWork has fashioned itself into a business services platform, and the more partners and benefits the company can negotiate for its members, the more valuable the company becomes for its members. Cross-platform network effects also exist in that the more users WeWork attracts due to the strength of its services, the more valuable WeWork becomes to its partners, thereby increasing its bargaining power over them. WeWork also operates an online blog called Creator featuring WeWork companies and members, as well as covering entrepreneurship-related topics. The larger the WeWork community, the larger the content pool grows for Creator and presumably, the more valuable the posts. In turn, growth of Creator could become more meaningful for the WeWork members as a marketing tool.
Will WeWork make this work?
On one hand, WeWork is well-positioned to take advantage of the new employment and job environment of today. Freelancing is more popular than ever before, with freelancers comprising over a third of the American workforce. According to the U.S. Small Business Administration, “the number of small businesses in the United States has increased 49% since 1982.” With factors that lend favorably to coworking, WeWork may succeed in building upon and creating inherent network effects to become a winner.
The challenge for WeWork is that unlike companies like AirBNB and Uber that leverages the fixed assets of individuals and enjoys greater indirect network effects, WeWork is on the hook for providing the buildings and maintenance services to its users. Moreover, a downturn in the economy is likely to hit WeWork harder given its small business tenancy.
Nonetheless, it is clear that WeWork believes in the power of the platform, shoring up a ton of capital and opening buildings across the globe at lightning speed.