How WeWork Convinced Investors It’s Worth Billions
What the $10 billion co-working company’s internal financial documents tell us about how a decacorn is built.
Startups don’t turn into unicorns — the buzzword for companies valued at a billion dollars or more — without a good story attached. For WeWork — which leases office space, divvies it up into desk-sized chunks, and rents it out month to month, largely in fashionable cities like San Francisco and New York — the narrative revolves around catering to a new generation of young workers who want to be creators and collaborators, not office drones. It’s that promise of personal fulfillment that allows CEO Adam Neumann to claim that his company’s short-term subleases are “changing the way people work.” Business is going so well that soon, the five-year-old company expects to change the way people live, too, by offering shared residential micro-apartments under the brand name WeLive.
Investors are bullish on the tale. The company has raised $1 billion in less than half a decade, and its valuation has grown commensurately. In February 2014, WeWork’s financiers said it was worth $1.5 billion. In December 2014, a new set of financiers pumped that number up to $5 billion. Half a year later, most of those same investors injected another round of funding that doubled WeWork’s valuation to $10 billion. At that price, WeWork is one of the most valuable startups to emerge from the tech boom, more valuable on paper than Slack, Draft Kings, Lyft, 23andMe, and Warby Parker combined.
Even in a technology cycle whose “defining characteristic” is mega-financing rounds — where investors pour hundreds of millions in funding into a company on the chance that it will be worth billions — WeWork’s rapidly multiplying valuation (an appraisal of a company’s worth by its investors) has perplexed and alarmed observers. The New York Times, the Wall Street Journal, and even random bystanders on Medium have scratched their heads wondering how free beer and flexibility could add up to a $10 billion business model. “Believe It” read Wired’s dubious headline about the company’s $5 billion valuation last year. Writing in the Commercial Observer last month, Charles Clinton, CEO of the real estate financing company EquityMultiple, called it “perhaps the most polarizing recent valuation … many [real estate] industry insiders find the gaudy valuation to be completely insane.” CompStak, the commercial real estate database, said it felt compelled to investigate WeWork’s margins, because “[l]ike many in the CRE industry, we were curious to understand the math behind WeWork’s fast growth.”
Neumann likes to present WeWork as a star of the sharing economy, a technology platform that connects consumers to office space, just like Uber and Airbnb connect them to cars and homes, respectively. But how can an infrastructure-dependent real estate venture scale like a low-overhead software startup? How can a company that signs 15-year leases — but sells monthly memberships — expect to survive a downturn? How can an entity that doesn’t own its own real estate be “worth” more than three times as much asthe New York Yankees? Why does WeWork’s future look so bright when it sits smack in the middle of two bubbling markets (that is, tech and commercial real estate)? Why would a business model that drove one high-profile dot-com darling promising “the office of the future” into bankruptcy succeed this time around?
October 2014 fundraising documents obtained by BuzzFeed News reveal how Neumann answers those questions behind closed doors. The material was shared with BuzzFeed by someone familiar with the company, on the condition of anonymity, and independently verified. WeWork would only comment on a couple of aspects of its fundraising pitch. It includes a five-year financial forecast and a slide presentation (also known as a pitch deck), both embedded below, as well as a company overview. After reading these documents, investors such as Goldman Sachs, Harvard University, and JPMorgan handed WeWork $355 million in funding, along with the $5 billion valuation, as part of its Series D funding round in December 2014.
WeWork expected operating profit of $4.2 million from revenue of $74.6 million by the end of 2014. By 2018, the company predicted operating profit of $941.6 million on revenue of $2.86 billion. The number of co-working members were to set to explode from 16,279 to 260,000 in the same time period. WeWork forecast 376 shared office location in 2018, up from 24 in 2014.
This material was prepared a year ago. Since sharing this data with investors, WeWork has raised yet another $433 million (mostly from the same firms). In the interim, its predictions have changed significantly, as have some of its business practices. So these documents are less useful as a peek into WeWork’s current financial state than they are as a snapshot of a high-profile company on its way up (and up, and up) in a moment when investors are flush with cash and open to any company with the faintest veneer of technology, if it sounds like the upside is Uber-sized. Indeed, if these documents tell us anything, it’s that WeWork has mastered the kind of storytelling that locks down massive rounds and can earn what is essentially a real estate company the privilege of being discussed as — and valued like — a nimble Silicon Valley software startup.
The story is a good one. All told, the fundraising documents portray a company on a phenomenal trajectory. Profits, membership, and locations grow at an enviable rate, while occupancy hovers just below 100%. But the material also reveals that WeWork relied on enormous demand projections and certain accounting tricks — both of which are popular tactics among private companies — to keep its profit margins looking as high as its aspirations....MUCH MORE