WeWork IPO - Equally Cursed and Blessed?

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WeWork released their S-1 IPO preliminary document last Wednesday, the 14th of August. 

Reading and ruminating on it I’ve ended up with Gian Lorenzo Bernini on my mind. 

The wondrous Italian sculptor was commissioned in 1619 to create a portrait pair, the ‘The Blessed Soul and the Damned Soul’. These are now in the Spanish Embassy in Rome and face each other on either side of a small room, backed by mirrors. You cannot look at one without seeing the other. One is on the way to Heaven, the other to Hell. 

Seemingly an odd association to have come to in relation to a stock market flotation, it becomes less so when you look at how WeWork describe their mission as being to ..

elevate the world’s consciousness

and then compare this to the ruthlessness of execution in how the business is run in the following several hundred pages.

Most pertinently the 28 pages of risk factors, the byzantine corporate structure and the extraordinary set of financial statements about vast sums going back and forth between the company and its founder Adam Neumann. The pièce de la résistance of which is the $5.9 million paid to him when the company (of which he has almost total control) decided to change its name to The We Company and needed to buy the Trademark, which just so happened to be owned by a company owned by …. quelle surprise, Adam Neumann.

As has been screamed from the rooftops since this document went live, corporate governance within WeWork is a horror show. Quite how one borrows $10 Billion without a lender saying boo to a goose about governance is baffling. Maybe that is why Adam Neumann is so valuable; who else could get away with it? According to the Wall Street Journal Neumann's sales and debt transactions total circa $700 million. 

I genuinely do not know if such ability represents being Cursed or Blessed. 

Does anyone care? Who knows? My social media is full of people who do but as we all know our own filter bubbles are just that. Maybe outside my bubble no-one does care and this will make no difference to their flotation, but for me at present WeWork is so very clearly the Neumann Family Show that without knowing the man intimately (for all I know he might be 100% ‘worth it’) I’d rather watch how this all plays out.

Financially at least, things aren’t so good. As Professor Scott Galloway savagely wrote on the 16th ‘Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both.’ For the complete rant see https://www.profgalloway.com/wewtf

The faster they grow, and the increase in speed seems to be cast in stone, the more they lose. And even here the S-1 numbers are being queried. Just this morning CNBC reported that ‘Net losses at We Company would have been $1.39 billion as of June 30, instead of the reported $904.65 million’ (if an accounting gain relating to Warrants had not been included). They go on to quote an analyst pointing out ‘So the next six months are going to look closer to the $1.39 billion than the $900 million (loss)’. - https://www.cnbc.com/amp/2019/08/15/reuters-america-softbank-convertible-note-helped-cut-wework-losses.html

If you compare today with what was projected in 2015 the picture is abysmal. Buzzfeed (https://www.buzzfeednews.com/article/nitashatiku/how-wework-convinced-investors-its-worth-billions) published the Pitch Docs WeWork used when raising money at a $10Billion valuation. To quote from there:

‘By 2018, the company predicted operating profit of $941.6 million on revenue of $2.86 billion.’

So within 4 years things have ‘changed’, for the worse, by Billions of dollars.

That said, the last money raised by WeWork was at a $47 Billion valuation, so again, who on earth knows what to think. Cursed or Blessed?

BUT

… and this IS a BIG BUT … I still think WeWork are far and away the most innovative company in real estate, have fundamentally changed the industry (regardless of whether they blow up or not), that the industry will largely take the wrong message from any problems their crazy S-1 causes, and that non real estate industry commentators on this flotation almost all completely fail to see why the company is important, and what is, if not unique, then extraordinary about it.

So if we park the governance horrors in the ‘Cursed’ bin, together with no women on the Board (come on guys, this is 2019) and the ‘raising consciousness’ tosh, we can move on to the ‘Blessed’ part. Why are they ‘better than all the rest’?

  1. The flip side of the governance issues, is the fact that they have raised vast amounts of money, have scaled very fast, and built a global presence that is matched only by IWG. Incidentally, IWG often say they are 5 times the size of WeWork but as the company points out in their S-1 they are pretty much on parity today in number of ‘workstations’ available. IWG have a lot more centres around the world, but WeWorks are much larger. And in this game, size matters. At macro and micro levels.

  2. They have built a very strong Brand in an industry that throughout my whole career has adamantly insisted that Brands don’t matter, and aren’t needed or possible in real estate. The industry is 100% wrong, and WeWork is 100% right here.

  3. IF their ‘unit economics’ is as they argue, then the numbers will right themselves over time, as centres mature, fill up, economies of scale kick in, and the yield of each centre increases significantly. I cannot quite see how they WON’T make each centre profitable as, contrary to many assumptions, they are not a low cost office provider. In fact their office space is circa 3X the cost of conventional office space. They average about 50 sq ft per person against a European norm of 100-125 and a US norm some way higher than that. Per sq ft you are paying a fortune to WeWork. The point is you are using space more efficiently, much more efficiently. WeWork is actually a luxury good (or at last a Premium one).

  4. They recognise better than almost anyone in the real estate industry than technology matters, and is a competitive advantage. Whilst most real estate companies eschew employing technology talent (beyond ‘IT’) they have over a 1,000 on their books. They have also spent many tens of millions buying some of the best technology companies, in order to build an end to end technology platform for designing, building, optimising and managing real estate. Does anyone come close? Non real estate commentators say ‘they are not a tech company’ and ‘every company has lots of techies’ but what they do not appreciate is that WITHIN REAL ESTATE this is bunkum. Real Estate is not like other industries. It invests paltry, pathetic amounts in technology, and is institutionally luddite. In that company, WeWork stands out. Big time.

  5. They also recognise that ‘the real estate business is no longer about real estate’, which is something I evangelise about. It is, of course, still about real estate. Every real estate skill companies have today is still necessary; but is no longer sufficient. Real estate going forward is about Real Estate + IoT + Data + Workplace + Hospitality. It is about creating and curating great customer experiences. WeWork are very good at this.

  6. Following on from point 5 they further recognise that creating and curating a great ‘user’ experience for their employees is a major problem for companies today. A modern, agile, activity based office is complicated and internally few companies have the skills to create such a thing. Which is precisely why office satisfaction scores amongst employees are low. The modern workplace largely does not work for people. With their ‘Powered by We’ service WeWork are tapping in to what will become a huge market; designing, building, optimising and managing great workplaces on behalf of corporates. #SpaceAsaService is for everyone, not just startups. And the best thing about this? No leases, asset light operations. Get rid of the real estate obligations and a ‘real estate’ company like WeWork could end up looking much closer to a ‘tech’ company than many presume.

  7. The same applies in deals they have done such as at Devonshire Square, where effectively they partner with ‘Capital’ to acquire real estate and then, with the physical space entirely under their control, provide a product/service that is hard to replicate when just a leaseholder. As with, I suspect, all Flex Brands that develop over the next ten years (WeWork will not be the only game in town), partnering in various forms so that one can control the hardware + software + services of real estate will do wonders for their balance sheet. Maybe it’ll be less profitable but the opportunity to really scale is far higher.

  8. Lastly, one other area where they do think like a tech company is their understanding of the value of the ‘Network’ of members they are building and how providing them with an ‘Ecosystem’ of service providers cognisant of their wants, needs and desires (partly discerned through the technology they deploy in their spaces) will lead to a myriad of non real estate revenue opportunities. They will never have the network scale of a social network of the likes of Amazon or Apple but what they do have is their customers in their buildings a great deal of their time. We all have a lot of requirements during the working day; who’s to say our ‘Landlord’ cannot service at least some of them?

So…. WeWork - Cursed or Blessed?

Frankly I do not know. The governance issues worry me a lot. The numbers not as much but their variability is alarming. I could agree with the comment that they are the ‘most Unicorny Unicorn ever’ - slagging them off is not hard. BUT, they are also a rather remarkable company, super innovative and forward thinking. 

They are so much worse than many real estate companies, but also so much better.

Now if you could have a company with all the pluses but without the minuses that would be perfect. But then the point Bernini was making is that perfection is not possible; we are all Cursed and Blessed equally.

Let’s see what transpires.