The Revenue Models of WeWork

We Company has, over the years moved from lease length arbitrage to management fee collection to construction, and is now pivoting back to basics.

WeWork has always carried a risk with its long-term leases which could realize during economic slowdown when it would lose its short-term customers. The bubble didn’t have to burst for the company to implode. A self-inflicted wound has brought the company valuation down from $47 billion to everywhere between $5 billion to nothing.

These additional revenue streams were not meant to generate profits but to help brand the company favorably in the eyes of the investors.

Co-working, in essence, has two models. An Airbnb like concept, where the company is an intermediary platform brokering shorter-term workspace, and an operator model, in which the business controls the capital asset. Brands active in the former space include PivotDesk, Breather, LiquidSpace, Flexioffices. These, like Airbnb, and are self-policing and rely heavily on customer feedback.

Companies in the latter operate on the so-called ZipCar operator model, used in the co-working sector by WeWork, Workbar, Spaces, Central Working, Grind and others adapting to change like Regus. These businesses act as renters of space and facilities managers rather than intermediaries between users and operators.

Regardless of the model, co-working has three distinctly separate drivers. The first two colliding forces that grew its market share from 1% to 14% for example in London from 2000 to 2016 were the increasing demand from big businesses to be more flexible and the length and inflexibility of the traditional office lease. One result of this collision was Regus, a multinational corporation launched in 1989. Supplying flexible quantities of space on short leases across the world. Regus, like WeWork, expanded rapidly during a dotcom boom, but Regus became bankrupt in 2003 after the dotcom bubble burst and it lost its customers from the tech sector.

The Coworking timeline ● Jones Lang LaSalle, 2016

Regus was not established by or for the benefit of millennials. When we add the third driver of co-working, the millennials’ preference for the access economy, we provide the conditions for WeWork and many other co-working brands.

WeWork allowed its customers to license culture on a subscription basis.

Started in 2010, WeWork grew quickly from a New York co-working space into an international lessee company and a startup incubator. It made its money, though not profits, from lease length arbitrage — buying long leases, selling short leases and realizing the break-up value. In order for that to work, they had to sign into long-term lease agreements. Focused on growth over profits, it grew quickly into a unicorn backed by J.P. Morgan Chase, Goldman Sachs, SoftBank, and more than six other hefty investors.

Photo by Robert Bye on Unsplash

After noticing the likes of IBM and several other large companies booking entire floors in their existing locations, effectively carving out their own offices, WeWork, in 2017, added a new revenue model to its business. It allowed its customers to license culture on a subscription basis. You could no longer only purchase real estate, but an entire company culture needed to run a modern office. This included everything from fruit water and community managers, to corporate aligned interior design. It offered a full design and management of an office building including a management fee collection for branding, software, and staff trading services.

These additional revenue streams were not meant to generate profits but to help brand the company favorably in the eyes of the investors. Focusing on more intangible values like culture design made WeWork more than just a glorified property management firm. The fleeting esteem allowed WeWork to raise an additional $300 million from SoftBank the same year.

The next two years were spent on choreographing a move towards an IPO. The going public assumes increased valuation. Growth over profits mentality went on steroids and by the time the S1 was filed to SEC in August, WeWork was on the hook for $18 billion in future lease payments to building owners while having committed revenue of about $4 billion.

That and other things didn’t go unnoticed and the ambitious public offering resulted in aversive public regard. This together with the unusual business activities and over-valued investments brought down both the powerful CEO and the company valuation.

The following was written in a 2016 research done by the University of Oxford.

“Operators such as WeWork may continue to evolve as a management company — not a tenant, not a landlord but an operator like Marriott or Hilton. However, the probable emergence of a third model — the owner-operator — must also be considered. It would be surprising if a highly successful WeWork with a strong balance sheet did not in the longer-term de-risk its operations by acquiring the real estate it operates — in which case it would probably become a REIT.” – University of Oxford

As we know, this didn’t realize then, and instead, three years later, REITs are analyzing their own exposures to WeWorks ill-fated business model choices. Thankfully for many, the liabilities are minimal as out of the 2,800 office properties in the U.S. there are only 15 REIT-owned properties containing WeWork as a tenant which represents less than 0.2% of all REIT-owned office space in the US. Those who have leased out, most often have extensive safeguards and financial backstops to protect against WeWork leaving.

For a company in crisis mode, the top priority is cost-saving and restoring trust for investors and the public. This will lead to cutting jobs and getting out of secondary business activities. Laying off more than 20% of the 12 000 strong workforce and divesting from new ventures like Meetup and Wing. Getting out of construction, and with an 80% occupancy rate, mothballing some of the real estates is expected.

Almost too big to fail, WeWork is pivoting back to a pre-2017 company. The help of experienced executives, a new lifeline from investors and a sobering mentality change, might just be enough to turn it around into a stable and dare I say it, profitable company.

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