In January, Adam Neumann went on CNBC to quiet concerns that his company, WeWork, was in trouble. News had just broken that SoftBank Group, WeWork’s primary investor, had walked back a $16 billion deal, and Neumann, with celebrity pal Ashton Kutcher in tow, wanted to reassure the world that demand for his office-space-as-a-service company was still high. In fact, he said, it was increasing.
“In Q4 of 2018 we’ve seen a big drop in the market, WeWork has never grown faster,” Neumann said. “We would use the opportunity of a downturn to grow faster.”
Flexible office leasing has long been part of the office market, and has gone through more than one boom-and-slump cycle. But coworking – the modern, jazzed-up, socially conscious avatar of flexible office leasing that WeWork pioneered and dominates – is yet to be tested by a downturn. If one were to come to pass, WeWork’s model would face its first existential test.
WeWork’s latest financials show that 2018 revenue about doubled year-over-year to $1.82 billion. However, net losses in that same period more than doubled, to $1.93 billion, and the company’s marketing spend almost tripled – a sign of its urgency to grow its customer base as occupancy rates and average revenue per member take a hit.
Detractors have challenged WeWork’s $42 billion valuation – that number makes it the second most valuable startup in the U.S. – and point to far more modest valuations of similar publicly traded companies. For example, IWG, which provides office space through its Spaces and Regus brands, and has almost 100,000 more work stations than WeWork, is worth just $3 billion.
“We have benefited from a lack of people understanding our business, and we have had no challenges raising capital and equity from the largest, most sophisticated investors in the world,” Michael Gross, WeWork’s Vice Chairman, said in an interview.
While the company’s risk of defaulting on its lease obligations seems low, it remains reliant on “the strength of its balance sheet and deep-pocketed investors,” according to a recent report by CB Insights, which analyzes high-growth private companies.
If WeWork’s access to cash dries up, however, it may find itself lacking a shield against any upcoming downturn, and high-cost growth may no longer be an option. SoftBank’s January decision to slash a planned $16 billion commitment to the company came a month after investors in the Japanese firm’s Vision Fund expressed reservations about WeWork and after SoftBank’s mobile-services division had a lukewarm public offering.
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