WeWork: How can shared office space be valued at $10bn?
WeWork runs a simple office space arbitrage model. How can it be valued at $10bn? Is it sustainable?
WeWork
“I’m working on a start-up idea”; “I’m looking for a job in a start-up”. Common, somewhat nauseating answers to the question of what people are doing for the summer here at HBS.
Only, these answers aren’t unique to business school students, nor is it a recent phenomenon.
Economies run on small businesses. Every year hundreds of thousands of companies are ‘born’ and ‘die’ in the US, as shown in the exhibit below – in 2013 over 400,000 new companies were registered:
It’s also a global truth – in the UK, a company was started every minute.
When companies start out on this process they face a tremendous amount of uncertainty, challenges and issues.
WeWork tries to resolve some of these issues.
Business model
The WeWork business model is very simple – they rent office space at scale, split it up and rent it out to smaller organizations with margins attached.
- Creating value: WeWork focuses on creating value for organizations in two broad ways. Primarily, they provide small organizations with greater flexibility. Offering short term lets that roll month to month removes a key pain point of small start-ups of when they can commit to an office. Secondly, they create a network around all of the organizations that they have working in their offices, creating a community of innovative people to discuss business ideas
- Delivering value: WeWork provides a fully stocked office space that includes desk space, wi-fi, coffee machines, meeting rooms and social areas. They provide everything that organizations need, in the scale that they require them. It’s a network effect
- Capturing value: The capturing part is easy. WeWork has the scale to rent large scale office space at a cheap price. They break it up into start-up sized pieces and rent it out at a premium. WeWork does not buy the offices so they do not have to carry heavy assets on their balance sheet, but they do commit to long term leases
It’s a simple arbitrage model. So what about their operating model has made them so successful and convinced investors to value them at $10bn?
Operating model
Office space design
First and foremost, WeWork provides the product that their clients demand –a fully stocked office space, different sizes based on your organization size and no long term commitment. It’s that innovation that remains core to their success.
The exhibit to the left shows a floor plan for the first floor in the Seattle office. You can see the diversity in options available, from single desk spaces to a space that can accommodate up to ~20 people. It’s configurable beyond that as well.
Additionally, everything in a WeWork has been carefully designed to encourage people to meet. Hallways are narrow, the kitchen area is small and all glass above chest height is transparent.
Encouraging people to connect is important to building their competitive advantage.
Flexibility and pricing
The monthly price plan is a huge plus for their clients. On top of that, there are multiple options in terms of intensity of use of the shared resources.
A small client that doesn’t need big meeting rooms can pay for them as they are required.
Network and community building
With so many entrepreneurs and small business people in one roof, when you join a WeWork, you join a large network of creative, business people. This creates a huge potential upside for collaboration, innovation and business dealing.
Don’t forget – a lot of start-ups are not the sexy tech based that HBS students dream of joining. A large number of them are single person law firms, accounts and professional services that have gone out on their own. When you sign up to operate out of a WeWork, you gain an instant pool of potential clients.
WeWork is also about having fun – there are plenty of communal events. The communal kitchen area has free beer for people to toast the end of the week, day, lunch or hour.
Trips are also arranged for people to interact outside of the office environment. Bringing everyone together helps to make it a fun environment to work and a place that people enjoy going into work.
Technology
It’s 2015 – so that means there’s an app for it.
The WeWork app helps to make things easy for their companies, they can book meeting rooms and connect with the broad network, asking questions, engaging in discussions and finding someone with the expertise that they require.
Global
Finally, it’s fast becoming a global model – with offices across the US and now locations in Amsterdam, London and Tel Aviv, you have an instant network of people in these locations and a place to work if you find yourself there.
So where can WeWork go now? And what’s to stop competitors?
The network is key to ensure WeWork has competitive advantage. This model is relatively easy to replicate, but hard to execute well. The more people see a value in being a part of the WeWork community, the longer they will be willing to pay a premium on their rent.
Additionally, things that could help ensure the sustainability of WeWork in the long run:
- Strategic partners: There are a core group of things that start-ups require: legal advice, accountants and investors. The more WeWork can begin to start these introductions, they could look to diversify their revenue stream
- Longer term rentals: One core risk is the danger of a significant down turn in the economy and WeWork not renting out their space. For organizations that have more secure cash flows they could offer longer term rentals to help provide some mitigation
- Data: As they continue to expand, the data they have on the organizations will become a large resource that they could look to
As with every network based business, they come with risks of distracting from their core business model and need to be balanced carefully.
Sources
UK data:
http://www.telegraph.co.uk/finance/yourbusiness/11327630/A-company-born-every-minute-in-2014.html
Small Business Association
https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf
US Census data
http://www.census.gov/ces/dataproducts/bds/data_firm.html
WeWork benefits
https://www.wework.com/benefits/chase
WeWork valuation
Interesting that lots of shared workspaces were hosting startups, but none have really succeeded in offering the Lab Incubator experience. How do you think they succeeded? And, do you think their model is scalable internationally (it does have high fixed costs)?
I think there’s a couple of reasons. Firstly, the idea of giving office space month to month is still relatively rare to find – this gives these new organizations the opportunity to trial the office space without a long term commitment. Secondly, the focus on the network is key – other shared office space don’t invest nearly as much on bringing the organizations in their community together, helping to create value to their organizations other than just bringing them the office space they demand. Finally, if you ask people at WeWork what business they’re in – they’ll tell you they are a technology company – this focus on delivering value through different avenues helps to separate WeWork from other shared office space
On the international point, the model can definitely translate to any location where there’s sufficient scale of new start-ups or small organizations. It’s also a new way to add value to the organizations, if you are considering serving a new market, they’ll be able to ask some of those provisional questions to other markets.
You’re right that it’s a high fixed cost business, but their model does favour them – they have the scale to negotiate good rates on their office space, and the organizations they serve actually have very little leverage as there aren’t a ton of other options in such good locations. There is little to stop other organizations coming in and WeWork will have to continue to offer good services to those organizations that set up with them.
Great post on a fascinating company. One wonders if structures like that will dramatically lessen what is actually needed to define what a company is… I wonder – do they have the scale to cluster occupants by industry focus? It might have interesting implications.
They’re definitely helping to remove some of the barriers. On the clustering point, it’s an interesting one, there’s over 20,000 members within the WeWork network at the moment, so they are definitely generating some scale. A couple of potential challenges to doing that: firstly, trying to design the office floor plan with this in mind is a logistical challenge – they do have fixed costs and it’s in their interests to rent out space as quickly as possible. Secondly, I can see how some clustering might be helpful in some business areas, but it could also hinder others – consider freelance accountants and lawyers, the may actually lose out from more of a focus on clustering.
Interesting post on a great company!
I especially enjoyed the focus you had on forming a community as a key method to creating value. I also agree this is one of their key competitive advantage and am curious to see how they can duplicate this model for other industries – WeLive? WeEat?
Replace the ‘i’ with ‘we’ – way more collaborative. 🙂
As a prior member of WeWork, I find this perspective on their business and operating model intriguing with regards to scale vs. individual experience. WeWork has clearly focused on how to get as many small businesses in as possible, but I found their model for individual users somewhat inefficient. Perhaps they view individuals looking for co-working spaces as ancillary right now while they focus on growing, but their lack of customer service for them led me to cancel my membership. Beyond the monthly subscription, every time an individual wants to use a co-working space, he/she has to pay with “tokens” purchased on top of the subscription. Without really understanding why this additional feee was necessary, it seemed to me that the company was just extracting value without providing matching services to justify it. As WeWork continues to expand and think about more value-add ons, I’d like to seem them consider how to capitalize on those individuals tinkering away in coffee shops all day that could benefit from the network effects of co-working spaces.
Interesting – I worked in a WeWork for a few months and never had this experience, in fact quite the opposite, a large amount of flexibility to squat in rooms even when I hadn’t paid for them. Perhaps for those ‘coffee shop tinkerers’ there might be an even earlier stage model, where it is akin to the foyers that most WeWorks have currently and you don’t even need an official office.
I agree that the risk of trying to monetize all these ancillary tasks is risky as it chases away these young companies who could turn into the longer term ones that they need to reduce some of the risk of holding these long term leases.
Sweet post, Stuart! The $10Bn valuation still baffles me even after seeing tons of their spaces and adopting some of their systems and community efforts at our incubator. It’s clear they have dominated the sector, but looking at the member fees vs standard lease rates, you have to believe they’re getting this real estate at HUGE discounts to market value for the economics to make sense, and I’m just not sure that’s the case. Moreover, while traditional coworking spaces can leverage 100%+ occupancy rates within shared space, WeWork prioritizes private office space which is intrinsically more difficult to optimize in a static business scenario, let alone with mobile startups that are continuously growing or failing (especially since they give preference to referrals and existing member requests over new applicants). Wonder if this is what compelled them to launch the new WeWork commons program (general “community” membership) — i.e., to create an ancillary and more stable revenue opportunity. Definitely an awesome company overall, but do wonder if if the past few years have been too far too fast for them.