The WeWork Debacle Is a Symptom of a Much Larger Problem
You can’t treat every company like a software startup darling
When I first arrived in Poland in 1997, it seemed like the entire country was being rebuilt out of the Marriott hotel. Multinational companies looking to set up shop in the formerly communist country would rent temporary offices at the Regus Center there to get operations rolling. Later, they would move into more conventional space.
It was a good model that provided a useful service, but I was surprised to see that 20 years later that same model, in the form of a company called WeWork, was being given a $47 billion valuation for an upcoming IPO. I was somewhat less surprised to see that valuation crash and burn almost as soon as the prospectus came out.
This is becoming a common tale of woe. Theranos, once the darling of Silicon Valley, was exposed as a fraud. Uber, the poster child for the sharing economy, saw its stock price collapse after it once again posted massive losses. It’s time to face facts: These are not isolated incidents but indicative of how Silicon Valley investors misjudge the physical economy.
The WeWork business model
The WeWork business model is essentially the same as I saw in Poland two decades ago. The company acquires space from building owners using long-term leases and then rents that same space out to businesses and entrepreneurs in the form of individual desks or offices. By charging more for the space in pieces than it pays for the whole, it can earn a profit.
A look at the financials of IWG, the parent of Regus, shows how this model can make for a decent business. In 2018, the company earned an operating profit of 154 million British pounds on £2.5 billion in revenues. That translates into 6% margins, which is respectable for a real estate business. So WeWork was, in a sense, following a tried and true path.
How can a company that’s losing money hand over fist be valued more than 10 times higher than a similar business that’s already profitable?