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Why WeWork Is Considering An IPO Despite Losing $1.9B in 2018

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08:51   |   May 20, 2019

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Why WeWork Is Considering An IPO Despite Losing $1.9B in 2018
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  • The We Company, parent company of WeWork, is the latest in a string of
  • startup unicorns set to go public this year.
  • Its core business revolves around leasing whole buildings or parts of
  • buildings, transforming them into hip coworking spaces, and then renting
  • them out to everyone from startups and freelancers to large enterprises.
  • WeWork is now the single largest office tenant in New York and SoftBank
  • has valued it at 47 billion dollars.
  • It was created just less than 10 years ago with the premise of creating a
  • new way to work.
  • So these are coworking spaces where people can rent a desk for a day, they
  • can rent an office for a month, and the whole idea is that there is a
  • community behind it as well.
  • So you're not just buying desk or office space but you're buying into this
  • new way of working.
  • But just like other newly public companies such as Lyft and Uber, Wework is
  • not turning a profit.
  • In fact, it's hemorrhaging cash.
  • Believe it or not, they lost more money last year than even Uber did.
  • They burned through 1.9
  • billion dollars in cash and that was actually greater than the amount of
  • money they brought in, their revenue.
  • The only difference is, you know, for example, if no one called for an Uber
  • tomorrow, Uber wouldn't have to pay all those drivers.
  • But if no new tenants showed up at WeWork tomorrow, WeWork has, you know,
  • however many hundreds of buildings now that are ready for them.
  • And so that occupancy would be an expensive of WeWork.
  • Despite its losses, the company is growing quickly.
  • Now, WeWork says it's in 485 locations and has 466,000 members, up from
  • 186,000 at the end of 2017.
  • How fast are you growing?
  • Very.
  • What kind of numbers are we talking about?
  • We're talking about probably one of the fastest physical expansions that
  • has been seen for the past 10 years.
  • Right. It's the sort of tech startup playbook.
  • Growth at all costs.
  • And at least in the private markets, investors have been fairly receptive
  • to this model.
  • That's why WeWork as well as Uber and Lyft, Pinterest, many others have
  • been able to raise so much money.
  • But what we're seeing right now as these companies go public is that
  • public investors may have a different attitude towards this strategy.
  • They may want to see a path to profitability, which so far WeWork doesn't
  • really have.
  • Basically, Lyft and Uber's stumbles may bode poorly for WeWork's chances of
  • a successful IPO, since all companies are currently focusing on growth
  • over profits.
  • I think the market will be less receptive to that story today than it would
  • have been a month ago.
  • It's going to be very difficult for them if they don't have a very clear
  • numbers-based narrative for how their loss profile is going to improve
  • significantly.
  • Traditionally, WeWork has relied upon funding from private investors, the
  • largest being Softbank, which has poured more than 10 billion into the
  • company, including 2 billion this year.
  • But once WeWork goes public, its value may depend on whether investors
  • view WeWork as a real estate company or a tech company.
  • Critics would say that it's just simply an overvalued real estate play.
  • All it does is take out leases, longer term leases, and then rent out
  • these spaces in the shorter term, which could be a recipe for disaster if
  • we ever were to see a recession.
  • We're not a real estate company.
  • We're a community of creators, and what we do is we take space and through
  • dividing it up, through sharing it up, we give creators all around the
  • world the opportunity to change the way they work.
  • But The We Company actually did recently set up its own real estate
  • investment platform, called ARK, so it can buy and develop properties
  • around the world.
  • The announcement came after Neumann received criticism for buying
  • buildings himself and leasing them to WeWork, potentially posing a
  • conflict of interest that could be alleviated through ARK, since it will
  • be run separately.
  • ARK will still be under The We Company's umbrella though and Wallace
  • cautions that with this new venture, the company is taking on even more
  • risk.
  • It means that when things get bad or when things change, it's harder for
  • them to be flexible.
  • Because if you rent the building, I mean at least theoretically there is a
  • cost that you can pay to get out of that lease.
  • It's harder if you actually own the thing to get yourself out from under
  • the costs associated with.
  • The company has also expanded into housing and education over the last few
  • years. One division, WeLive, offers coliving spaces in New York and D.C.,
  • basically flexible apartment rentals where residents share amenities and
  • can stay for days or months.
  • Another division, WeGrow, recently opened a for profit pre-K and
  • elementary school in New York, billed as a place that fosters conscious
  • entrepreneurialism for its students.
  • The company has even expressed interest in branching out into banking.
  • To better reflect all these various offerings, WeWork rebranded as The We
  • Company at the beginning of the year.
  • With all of this, WeWork is aiming to use its technology platform to
  • capitalize on the idea of community more broadly, whether that's in the
  • workplace, home or school.
  • So if investors do buy into this concept of WeWork as a diversified tech
  • platform, its value proposition makes much more sense.
  • I think part of what gives them that tech company vibe is the network
  • effect. And I think that in growing into other areas such as WeLive or
  • WeBank simply helps them solidify that network effect and that overall
  • it'll help drive value and eventually profits for them.
  • Right now though, WeWork's main business still is renting and leasing
  • massive amounts of real estate in some of the most expensive cities in the
  • world. It has 59 offices in New York, 47 in London, and 25 in the San
  • Francisco Bay Area.
  • While it competes with other coworking and office rental companies like
  • Regus, Industrious and Impact Hub, We Work is the only one valued like a
  • major tech company.
  • So this is the other thing about the sort of Jedi mind trick that WeWork
  • has presented to investors that are giving it such a lofty valuation, is
  • you know renting offices, you know, isn't really rocket science.
  • Right? So the risk is that they build WeWorks in a huge number of
  • buildings at phenomenal expense and don't have enough tenants.
  • And so if you have the full load of costs of renting and building out all
  • of these offices and furnishing, you know, kegs of beer or new ping pong
  • balls and you don't have tenants, it's going to be very difficult for them
  • to rationalize those costs.
  • If it's going to live up to this valuation, a key driver of profitability
  • could be the growing number of WeWork enterprise members, that is big
  • corporations that have longer rental contracts than freelancers or
  • startups.
  • 40 percent of the business are long term commitments.
  • Okay. Longer than a year.
  • And then another 20 percent are longer than month to month.
  • The likes of IBM even Amazon are renting office space from them.
  • So the idea is in the future you got a lot of the subscription revenue
  • from the bigger companies and that is enough to eventually bring in money.
  • For now, WeWork says its losses are not a problem.
  • Minson also urged me to look at losses as investments because he said that
  • coworking is a proven business model.
  • And guys that may hint at the narrative the company will sell to Wall
  • Street as it heads towards its IPO.
  • So why not just focus on growth now and go public later?
  • If you're losing two billion dollars a year, then you have a very big cash
  • problem that you need to figure out a solution to, and the public market
  • is obviously one place that can do that.
  • Basically, given the rate at which WeWork is spending, it may need more
  • than what private investors can offer.
  • While the company recently raised another 2 billion from SoftBank, this
  • was actually a disappointment, given that SoftBank had been considering a
  • 16 billion dollar investment.
  • There are just very few private players that can write those kinds of
  • checks that they need in order to grow at the pace they'd like to.
  • In this climate though, WeWork may find it hard to get underwriters
  • onboard.
  • One of the choke points that we see is that there are only a few
  • underwriters in the world that could lead manage a deal this big.
  • And so that is one of the things that WeWork is going to have to overcome,
  • is find a set of underwriters that are willing to tackle this, given the
  • rough sledding that both Lyft and then Uber have seen.
  • But assuming WeWork does go public soon, it's already amassed so much power
  • that some believe failure isn't even an option.
  • WeWork has now become one of the biggest corporate landlords, so some might
  • argue that the company is now too big to fail, that the real estate
  • developers which they rent from won't allow the company to fail because
  • they have so much at stake.
  • Of course WeWork's ultimate vision is far more ambitious than just being
  • propped up by developers.
  • WeWork wants to become a platform.
  • They don't want to just be coworking.
  • They want to be in the education space, the living space, potentially even
  • the banking space.
  • The idea is sort of the Amazon playbook.
  • You become so big, you invest so much into the business, that one day you
  • do turn a profit.

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Description

WeWork's parent company, The We Company, is set to go public this year. It's the latest in a string of richly valued start-ups considering an IPO in 2019. Even though The We Company was recently valued at $47 billion it’s hemorrhaging cash and lost $1.9 billion on $1.8 billion in revenue in 2018.

Things improved for WeWork in the first quarter of 2019, but only slightly: The company says it lost $264 million on $728 million in revenue during the quarter.

Its core business centers on renting out co-working spaces to everyone from startups and freelancers to large enterprises. WeWork says it’s in 485 locations and has 466,000 members, up from 186,000 in 2017.

The We Company's CFO told CNBC that investors should look at WeWork’s losses as “investments” that will lead to more cash flow. However, Lyft and Uber’s recent IPO stumbles could bode poorly for WeWork’s chances of a successful debut, as investors seem wary about taking a bet on companies that lack clear paths to profitability.

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Why WeWork Is Considering An IPO Despite Losing $1.9B in 2018