From WSJ Pro—Venture Capital
October 16, 2016
When Adam Neumann pitches potential investors on his startup, WeWork Cos., he likes to rev them up with a jaunt through his company’s shared office spaces.
Before arriving, the 38-year-old chief executive typically sends staffers a directive: “Activate the space.” WeWork’s employees swarm a lounge to host an impromptu party with pizza, ice cream or margaritas.
When Mr. Neumann and his guests walk in, he often remarks how the office always seems filled with life, according to several former employees.
Fueled by showmanship, an expansive vision and the occasional shot of tequila, Mr. Neumann has propelled the New York-based office-space provider into being one of the world’s richest startups. With a valuation of more than $20 billion, or about 20 times annualized revenue, it is the fourth most valuable U.S. startup after Uber Technologies Inc., Airbnb Inc. and rocket company Space Exploration Technologies Corp., known as SpaceX. WeWork’s valuation has galloped higher in each of the past five years.
Mr. Neumann has dazzled tech investors by portraying WeWork as a Silicon Valley-style company that provides a “physical social network” for millennials. Top investors include SoftBank Group Corp. and its tech-focused Vision Fund, which added $4.4 billion in August.
Others in the real-estate industry and some Silicon Valley investors say the company’s well-crafted image belies the mundane nature of its business. WeWork takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month.
IWG PLC, an office-leasing company with a business model similar to WeWork’s, manages five times the square footage and has about one-eighth the market value.
Boston Properties Inc., the country’s largest publicly traded office landlord, owns five times the square footage that WeWork manages and has a market capitalization of $19 billion.
WeWork’s strategy carries the costs and risks associated with traditional real estate. Its client list is heavily weighted toward startups that may or may not be around for long. WeWork is on the hook for long-term leases, and it doesn’t own its own buildings. Vacancy rates have risen recently, and the company is increasing incentives to draw tenants.
“If you had positioned this as a real-estate company, it wouldn’t be worth this,” said Barry Sternlicht, who runs Starwood Capital Group LLC, with more than $50 billion of real-estate assets under management. Mr. Neumann “dressed it up and made it into a community, and that turned it into a tech play.”
Venture capitalists and mutual funds have poured billions into companies claiming they can upend traditional industries whether through the use of technology or their unique appeal to millennials. Startups in the business of selling meal kits, mattresses and razors have received tech-like valuations based on the idea their rapid growth can continue for years.
Mr. Neumann in public remarks often compares WeWork to ride-hailing company Uber and home-rental service Airbnb, whose valuations soared on the premise they were technology platforms, not taxi or hotel companies.
Some of the air is now coming out of that balloon. Shares in Blue Apron Holdings Inc., the meal-kit maker, are now trading at half the price of its IPO. Juicero Inc., the seller of a cold-press juicing system, announced in September it was halting operations after having raised $100 million in venture capital.Previously:
At WeWork offices, options include a single desk in an open space, dedicated offices with doors, and full floors for more established companies, including Amazon.com Inc. and International Business Machines Corp. Common spaces have couches, foosball tables and beer kegs for meetings and socializing, and events take place frequently.
The model has proved popular, with 150,000 individuals renting space in more than 170 locations globally.
Mr. Neumann, who declined to comment for this article, has said WeWork is neither a real-estate company nor a tech company. The “We Generation,” as he calls it, craves sharing and collaboration rather than isolated offices. “They’re coming to us for energy, for culture,” he said at an event this summer....MUCH MORE WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust
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