back
194 comments
Refreshingly, this article opens by stating the strong case FOR WeWork’s business, before getting down to asking whether this is a sound investment given the founder’s behaviour and the structure of the company.

But when it does turn its attention to that, it is as unflinching in its criticism as it was optimistic in its appraisal of the business opportunity:

Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.

The bull case is that it has the potential to become as valuable as Marriott which is about $43 Billion in market cap.

Marriott for the most part has transitioned mostly to an all digital company over the past two decades. The Marriott of today is primarily about hotel operations (i.e. branding, bookings/pricing/revpar/SEO, front desk, housekeeping, wifi, remodeling) and its loyalty rewards program and mobile phone app (BonVoy).

Much of its assets have been moved to a standalone REIT that trades under a different ticker. In a way similar to WeWork, Marriott effectively leases hotels from the REIT.

So in that sense, if WeWork can be considered analogous to Marriott, then in a hand wavy way the $47 Billion market cap valuation could somewhat make sense.

The bear case is that its not a well implemented corporate structure full of accounting traps and is actually a fraction of Marriott's valuation...

Apply Buffet's investment thesis to WeWork, one should stay away from this company because of the bad management team.
Speaking to the business model, in my midwestern city a few coworking spaces popped up only to go broke within a few years. The only one to last is funded by VCs and mostly as their incubator. That VC one is thriving because the rents are heavily subsidized. If they ever rose prices, I doubt their membership would have any problems getting up and leaving as they don't have ties there by the nature of "coworking." It's the Uber/Lyft problem-- easy to switch between 2 competitors offering a commodity service. Good luck ever becoming more than marginally profitable. Heck, they're a real estate business, and they can't take advantage of deductions as effectively as LLCs or individuals can. As this realm matures, and they spend money and effort vetting markets, enterprising partnerships can swoop in offering localized services for cheaper.
Wouldn't recession make business real estate dirt cheap for WeWork too? Wouldn't it make flexible business spaces even more valuable when things are uncertain?

At first glance, maybe a recession can enable WeWork to acquire lot's of real estate under really favorable conditions and make it's premium when the recession is over. Don't you think so?

Also I'm under impression that the WeWork ysers are not the well funded companies but smaller companies and contractors and those people usually make money on their services, instead of relying on funding keeps flowing intil they exit.

The other possibility I don't see discussed often is they might simply be trying to become big and entrenched enough that bailouts of some variety (probably just endless tax breaks extracted at the local level) become mandatory for the business to survive.

If you entrench yourself deeply enough and people are looking at eviction and foreclosure and cancelling construction projects they could fight for this. Call it capitalism by hostage negotiation.

This actually seems to be what some larger companies like GE are planning on, (and Foxconn has already executed successfully) but it's bizarre to see this plan launched at the IPO stage.

I'm glad Ben laid out the bull case simply because nobody else is doing that. However, the analogy to AWS isn't compelling. First, running data centers is a much bigger challenge (technically, organizationally, and financially) than running your own office space. That's why AWS can maintain 30% gross margins and still be cheap at the price. By contrast, it's hard to imagine WeWork getting that kind of margin for repackaging leases (and adding beer and smugness into the mix.)

With the rise of serverless computing and similar technologies, there's also the question of utilization. Setting up your own server for an occasional request is expensive because you end up using some small percentage. of the capacity. AWS can make a lot of margin by pooling and smoothing demand for those occasional services. I don't think there's a good analogy in the office space category: maybe shared kitchens? Your average small business is much better at managing it utilization percentage for office space than for compute.

While this is true, the ability to get space in a new city for exactly as many employees as needed, without having to have someone on the ground who knows local neighborhoods is pretty compelling. By going with WeWork a company has reasonable assurance that the location will be in a good place, have nice amenities for happy employees, and have the comfort knowing they are purchasing the right amount of space for their current needs and can expand or contract quickly. This makes expansion much quicker and lower risk.

Sure a company doesn’t need to offer beer or kombucha or be in central working districts, but not having to figure out all this info on their own when they just need a few rooms in a remote city is what companies are paying for. Like scalable sever infrastructure, the benefit isn’t the cost savings, so much as not having to hirer experts for things outside your business domain.

I wonder if this is true. My one startup experience sure involved the management spending a lot of time scouting, negotiating for and renovating space rather than doing things that actually made the company successful.

Is the WeWork moat as big as AWS, probably not, but dealing with local real estate regulations and contractors in hundreds of jurisdictions around the world is not nothing.

> First, running data centers is a much bigger challenge [...] than running your own office space.

> With the rise of serverless computing and similar technologies, there's also the question of utilization. [...] AWS can make a lot of margin by pooling and smoothing demand for those occasional services.

I disagree with both points. I'm a small business owner - I was also a small business owner in 2012. (Two different businesses). One of the biggest changes that have helped me out nowadays vs. back then, is the fact that WeWork exists.

In 2013, when we decided we wanted an office, we started to look for one. This was a super long process, and in our specific case we eventually gave up and stayed with a previous arrangement (unimportant to the story - that's usually not an option). The reason this was complicated was:

1. We needed to actually find a good location and a place that looks decent. This a) took time, and b) wasn't easy for a decent price.

2. Once renting a place, we'd need to decorate it / etc to make it actually usable - most places aren't immediately ready. This also includes furniture/etc, without which the space isn't useable.

3. We'd also need to take care of a lot of related payments and setup - internet, electricity, etc. Internet alone is annoying, as you have to setup office routers/etc.

4. To make everything really complicated - we had no idea how much space to get. We were a 10 person company, with plans to grow. But leases are for 2 years - do we get a space for 10? Of course not, if we grow we are in trouble. For 20? That means we're paying for a lot of excess space for a few years.

Compared to the above, setting up servers is much easier :) And as you can see in point #4, WeWork can smooth out capacity.

In contrast, last year my new company (2 people) moved to a WeWork. It took 3 days - we looked at 2 locations (also non WeWork), picked WeWork as it was the best combination of price vs. space provided, and moved in a week later. WE recently grew to 4 people - it took 3 conversations, and we found a new room in the same building that can house 4 people, we moved a week later.

> I don't think there's a good analogy in the office space category: maybe shared kitchens?

I worked for a startup that also rented out our extra space to other startups and there were a ton of benefits: conference rooms with tvs and teleconference hardware, phone booths, a very nice coffee maker and other kitchen appliances, shared outdoor space, nice furniture, copy machine, a receptionist... all things that most of the >10 person companies would not want to buy for themselves, but we all got to share because of the setup.

I agree that this is a refreshing take, and while I'm not fully sold on his argument I will play devil's advocate. The large part of any excess margin WeWork earns will not be necessarily for their operational expertise, but for the optionality for the customer which has real value.

With respect to utilization, there are some small businesses which are seasonal, or which have lumpy staffing requirements, for which we work might fit the bill.

I lived through the dot-com bust. In Silicon Valley, there were scores of "technology parks" that were completely abandoned for years afterwards when the bust hit.

This is a company that can thrive in a Fed-fueled ZIRP economy that only goes up. If we don't dip into recession and keep growing for the next 15 years, this company will be genius.

But if there's ever a stumble in the road, it's also the type of company that immediately collapses on itself.

I also can't stress enough how detrimental Softbank has been and will be to Silicon Valley. They are dumping billions into companies that have no business being alive and if/when the econonmy collapses, it's going to be bad for the entire world. It's like preventing forest fires that clean up dead brush and instead sets up for a huge uncontrollable forest fire.

I'm personally trying to figure out how to protect myself, whether it's through buying US Treasuries, or gold or diversifying my cash in various currencies. But personally I don't think the fund is going to survive and there will be terrible repercussions from it.

There’s also a possibility that the economy grows indefinitely, but remote work overtakes hour-plus commutes to city centers as the preferred working arrangement for startups.
Yeah Softbank is awful. They'll be the ones leading a group of companies into the black hole. "Follow me!"
What repercussions do you see for the fund not surviving ?
The comparison between WeWork and AWS the author attempts to make in the bull case is deeply flawed, IMO. He states the AWS story: commoditizing servers and allowing new customers to get in cheaply/quickly/easily.

Then he compares to that to We Work...well, don't many customers already have libraries, cafes, and their own homes to potentially work from? Did AWS customers have numerous server options to easily use in case they needed to save money? How are these comparable? Adding ping pong tables and surveillance tech to an open office work space is vastly less useful than AWS.

And corporate entities, surely WeWork will rely on those and not just contractors/freelancers/entrepeneurs, right? Well, corporations in a recession would likely lay workers off, so this dream WeWork has of gaining corporate partners seems unlikely in the next 5 years, if a recession is to hit as everyone claims. These corporate players will probably have excess office space of their own, never mind paying for more.

I appreciate attempting to present the bull case, but comparing WeWork to AWS is laughable.

I thought his AWS comparison was more favorable than it seems you did. I remember launching a startup in 2009 and our head investor (who was a CFO at a bespoke insurance firm) was floored when he saw our financial docs and that we were able to make our infrastructure expenses OpEx instead of CapEx.

As AWS got its start making it easy for startups to get access to infrastructure, the bull case for WeWork is that startups choose that environment over signing a traditional lease. It’s not that a startup can’t work out of a coffee shop, just like we could have theoretically run our own email servers. But a physical location and address has advantages and WeWork opens that to more people with less friction than the pre-WeWork options.

But that’s the bull case. I’m not a financial analyst and I’m not your financial analyst so this isn’t financial advice, but my risk profile tells me to pass on this opportunity...

> so this dream WeWork has of gaining corporate partners seems unlikely in the next 5 years, if a recession is to hit as everyone claims. These corporate players will probably have excess office space of their own, never mind paying for more.

What if the corporate partners are partners in flipping excess space in the case of a recession?

This is absolutely spot-on. AWS doesn’t replace email servers, as one commenter suggests. It offers compute infrastructure, a new need that grew alongside a truly novel business. Where’s the novelty of WeWork? Even now Wework has real competition, maybe not from IWG, but from myriad commercial business spaces that are just regearing for co-working — an immediate threat that further damages the AWS analogy.
I dont agree. Its actually the exact same thing. Before AWS you did not time share servers. Servers would be idle for long amounts of time if the capacity requirements were spiky. You have the same situation here, but for work areas/meeting capabilities. Going from a single tenant fully leased capability to a shared workspace model allows for much higher utilization of the underlying assets.
Narrative similarity only works in hindsight. i.e., if A succeeded, and A looks similar to B, which was hugely successful. Then A is claimed to be always having the success factor because it is similar to B.

To predict the success by drawing similarity is always fool's game.

The thing that bothers me about the comparison between WeWork and AWS is that Amazon builds, owns and operates AWS data centres. Wework largely doesn't own the properties. I think that's a pretty important distinction.

Also, whilst a normal business can't really build a "AWS competitor for Chicago" the "A WeWork competitor for Chicago" seems like a much bigger threat. If the only way that WeWork can win those situations is by running at a loss in competitive markets and then monopoly pricing in other markets you've got two choices: Either they'll never make money because they'll always be loss leading, or they're facing being broken up by a regulator.

This is such a valid point. I have some similar thoughts. Kinda reminds me of the Uber case recently. Think everyone has collectively realized that the moat is not as strong, and must go 'city by city'. WeWork seems to be operating on the same shallow moat as Uber, rather than AWS
Further, AWS had Amazon as its first customer. Eat your own dog food and all that.

I'm trying to think of a large business that could build (or did) an internal WeWork like division, and then offered that service to outside parties.

Huh. I guess that'd be a big white collar employer that did project centric work. Like a big consulting firm. Or an IT services unit, like Microsoft or Oracle.

Imagine Amazon bundling their own real estate, construction, facilities, space planning, and misc A/E/C functions as a service. For their own use. And then offering that service to outsiders.

That's what WeWork should look like.

--

I now predict that's exactly what Amazon will do.

Amazon will compete with WeWork and others in this space. With the advantage of themselves as their own first customer. And unlimited capital.

So, this brings us to the possibility that WeWork is a symptom of a broader problem, which is that all that money which central banks have been printing since 2008 has mostly gone into doing stupid stuff. Eventually, the reality beneath the accounting always comes to the fore. In 2008, the reality that spending so much labor and resources on ever bigger houses for people who already had houses, didn't really produce much benefit (probably not even for the people living in the new houses).

The money glut printed since 2008 has mostly not gone into new productive capacity, it has gone into a lot of software-related hooey like Slack, WeWork, Uber, and various new social networks. I don't even think these have improved the target sectors that much, far less have they been worth the labour and other resources put into them.

It feels like another Fiscal Crisis is coming.

Having used wework for a couple of businesses, and left after 12 months or so, I have a slightly different view.

I think wework is a noisy, distracting and expensive pit stop on the way to remote work. The company turnover at the weworks we were at was remarkable, to me. I don’t know the root causes (business closing? Unsatisfied?) but it seemed very transient.

Our businesses moved to fully remote and enjoyed a significant rise in productivity each time.

Wework feels like a massive bet on open plan offices. They didn’t work for us.

I respect the hell out of this author but this article to me fell a little short of his usual rigor/insight.

Two points I would’ve like to see him analyze given the AWS metaphor

1) gross margins - this article reports 15-20% not 30% AWS https://news.crunchbase.com/news/gross-margins-wework-and-th...

Maybe AWS was able to improve GM over time and the author expects similar trend but he should explore this given the whole biz is built around variable income.

2) comparing the core competency between AWS and WeWork. He only gives this lip service and assumes the two are the same but I don’t agree.

I buy the argument that There’s core competencies in server management. In the old days servers were pretty basic - you buy, install, and turn on. Done. But then companies realized all that fixed supply was expensive so they made server supply dynamic, being able to dial up and down on short notice. That, plus integrations with lots of dev tools, necessitated a lot of software on top of the hardware. So now a company can invest precious engineers in managing that, or can use AWS or Google cloud, where the fixed costs of developing that software scale infinitely. Plus add on new requirements around security, etc and it’s a lot for a company to manage in house.

Compare this to office space. The fixed cost of lease is NOT scalable (only so many people you can fit in a building), and the core tasks of managing an office are...basically the same as they’ve always been. Sure you have some new design trends and IT requirements, but it’s slow moving. And who manages office space? HR and IT, which while valuable, aren’t forcing companies into trade offs between working on that or new product features / revenue driving opps.

I definitely agree wework is valuable for the flexibility. I just don’t really see mass adoption from large companies in the long term. Sure some large company may temporarily use them when they enter a new market but they will revert to managing themselves once they feel confident in signing their own lease.

Regus (IWG) have been doing this for nearly 20 years. Apart from the slightly funkier interior decoration, what's the big difference?
I've started working in Mexico City as a European software engineer. My job offers 100% remote work and that allows me to work from anywhere. My home includes a girlfriend and her incidental home office, so I went searching for office space for myself, thinking it would be affordable in CDMX. There are like 7 WeWork locations and tons of other state of the art places to work. But for a private office sized to place one desk chair I'd be paying well over €500 euros per month. And it won't be a corner office, it'll be a glass-surrounded cubicle without a view.

So, instead, I went to look on AirBNB. I could rent a full apartment for about the same amount of money, except this would come with a view, with a couch, a shower, kitchen, weekly cleaning service, and all kinds of nice things.

But I kept on looking. There are numerous extremely luxurious buildings in the city where middle to high class people live. And a lot of them have rooms for rent. So I considered my own office room inside an apartment I share with 2 others. I can lock the door and I get 2 pets for free.

Best of all: The building is only 2 years old. They have a full sized gym on the 22nd floor, 7 swimming pools of which 2 olympic sized ones and 2 infinity pools, free saunas, free yoga and spinning lessons every day, a bowling alley and gaming hall, an indoor soccer field, et cetera.

So I took that. The building even comes with integrated office rooms and a full floor with couches and desks and tables and ping-pong tables and table-tennis tables and a grand view of the city. So it's not like they're against people working from there.

The problem with WeWork is that they aren't that interesting, not even in cities that are more expensive. The credits you get only allow you to switch locations until they run out, and then you need to purchase new ones for a lot of money.

They should really do a few things:

1. Look at the area they're in, at the very least be cheaper than AirBNB when it comes to offering a space to work from. 2. Once someone is a member, allow them to work from ALL WeWork locations (in the public areas). No credits cost, nothing. 3. On the website, per location, clearly show how crowded it is and how crowded it is expected to be that day.

They're way too expensive for what amounts to a crowded and noisy library. At least in a library people are expected to keep quiet so you can work. At WeWork I've been told you're to expect people coming up to you.

Side note: WeWork might be a great choice for companies who want to rent their first office space. That's not something I looked into.

>Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.

Absolutely spot on

Matt Levin recently wrote about this too: https://www.bloomberg.com/opinion/articles/2019-08-19/we-loo...
AFAICT, Uber, Lyft, AirBnB & WeWork's valuation can only be justified via the natural monopoly angle: network effects and all that.

Ben's AWS comparison is apt because I don't think many people consider AWS to be a natural monopoly. It has huge lock-in and a huge first-mover advantage, but is not a natural monopoly.

The AWS analogy is flawed because there is a “lock in” to the ecosystem of AWS services outside EC2 once you start using those services. Terraform aside, it is not easy to divest of AWS once you invest in it for your infrastructure.

WeWork, on the other hand, has very little “lock in”. Not much to stop your business from moving out.

Relevant thread on WeWork as well by Scott Galloway, from a few days back: https://news.ycombinator.com/item?id=20724260
The growing trend or working remotely is clearly contrarian to this case.

As a startup co-founder and CEO, I've never found their offer compelling enough, way too pricey to put it bluntly.

And I really think that remote work is here to stay and grow.

>"The obvious competitor is a company called IWG, with 3,306 locations and 445k workstations at the end of 2018. WeWork, in comparison, had 528 locations and 604k workstations as of June 30, 2019. Note the date mismatch — this isn’t a perfect comparison — but that only makes the point that these are two very different companies: WeWork had only 466k workstations at the end of 2018; a year earlier, when the Wall Street Journal pointed out that WeWork’s then-valuation was 5x IWG’s (it is now 13x), WeWork had a mere 150k, while IWG had 414k."

There are a ton of obvious competitors, they are not big, but they are everywhere, at least in the UK. Hotdesk rental has been a common SME thing for ages.

Slack grew, because anybody from your organization could just acquire the tool. No need to talk with IT.

What if same thing hapoened for office space. BYOD and support for remoting allows people to work anywhere. If marketing finds the company HQ unattractive, they could just move elsewhere.

Does it actually make sense for different teams to be stuck in one location. Should they instead work close to customers or partners?

AWS has data lock-in and offers fundamental capability-altering abilities to its customers. And it can't be replicated without a massive influx of capital to jumpstart (Microsoft, Google, etc).

WeWork has hundreds of competitors, including every building in a downtown with unused office space, to say nothing of better organized entities.

>The tech industry generally speaking is hardly a model for good corporate governance

I’d love to know what industry is!

2006 was the year that Amazon launched Amazon Web Services, a computer hardware business that leveraged the commoditization of hardware

I’m not sure that’s true. IIRC AWS started as a way to monetise the excess capacity that Amazon had to have on-hand anyway to cope with spikes.

The bull case for WeWork is really well laid out here. And what it tells me is that a well-run company competing with WeWork would (or will) destroy them.

Imagine a WeWork competitor that launches in a few years, at the bottom of the coming recession, that isn't doing sketchy financial things to make their founder wealthy. They could match or undercut WeWork's prices at a time when WeWork will probably be barely alive (if they make it that long) and still make money.

"AWS for Offices" is a great story, but it forgets that AWS has some serious competition now. Hardware as a service stopped being a disruption and became the norm with a competitive market. So too will "offices as a service" if WeWork's model is correct.

IMHO: Great stock to own if/when its trading about 50% down from its IPO. I feel similarly concerning Slack.
Before the next recession hits, WeWork will be the first to die.

I hope someone from WeWork reads this, and knows it to be true.

Why does this article keep calling WeWork a software company??????
I disagree that WeWork has a lack of competition, they are getting crushed in China and many local businesses are undercutting them. I'm shocked landlords sign leases with an entity they cannot sue.
This guy just gets off on being contrarian. Don't ask him the color of the sky.