2/17/2019

The WeWork Business Model

WeWork is at the forefront of the shared workspace industry and has quickly became the driving force behind its growth, proving definitively that coworking is the new normal. At less than a decade old, the brand is poised to keep growing in the coming years, especially after interest from global conglomerates.

WeWork is still shaking up the industry at every turn. Over the past few years, it has acquired tech startups such as office sign-in system Welkio and physical data software company Euclid in a move toward domination in the business sphere. The brand's app was just relaunched with new skill-based profiles to allow better networking between members. At the very beginning of 2019, WeWork announced The We Company, an entity that includes both the coworking brand and two new concepts: WeLive and WeGrow, which will be explained later in the year.

WeWork's incredible success has prompted dozens of questions: Who are the investors behind WeWork? How does WeWork make money? What are the financial risks associated with its business model? Why do landlords decide to take WeWork as a tenant as opposed to leasing directly? The answers might surprise you.

What is WeWork?

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WeWork was founded in New York in 2010 with a goal to offer coworking spaces to entrepreneurs, startup companies, freelancers and even larger entreprises. WeWork has grown rapidly ever since its establishment, making it one of the largest and most visible coworking chains in the world. It now has more than 5,000 employees and nearly 600 locations worldwide, including outposts in dozens of U.S. cities and 32 countries, like Brazil, Germany, and Thailand.

What are its membership options?

Flexibility is the key in WeWork’s business model, especially when clients no longer need to worry about long-term leases. The company offers four levels of membership: Hot desks, dedicated desks, private offices, and custom build-outs.

The cheapest option for single workers is the hot desk, when users pick a primary WeWork location, show up whenever they wish, pick any available seat in a common area and start working immediately. For those who want a little more stability, WeWork offers dedicated desks that they lease to one client or one business only.

Teams and businesses of all sizes can also opt for private offices, which come equipped with furniture and can accomodate dozens of workers as businesses grow. The most personalized option is a custom build-out, which presents maximum freedom for groups that want to customize their workspace with features like CEO suites, conference rooms or labs. WeWork scouts buildings and then transforms them and has already done this for Facebook, Microsoft, HSBC and Deloitte.

Who are the investors behind WeWork?

WeWork's investors include a number of global entities, including holding conglomerate SoftBank, private equity firm Hony Capital, and real estate developer Greenland Holdings. In August 2017, SoftBank and its founder, Masayoshi Son, poured a massive $4.4 billion investment into WeWork. This included $3 billion for WeWork itself, namely through primary investment and the purchase of existing shares, and $1.4 billion dedicated to WeWork’s expansion into the Asian market: WeWork China, WeWork Japan and WeWork Pacific. In August 2018, WeWork announced yet another $1 billion in funds from SoftBank.

As of 2018, WeWork had raised nearly $7 billion in private-equity and venture capital funding in the years since its founding. The immense interest by Asian companies such as Hony Capital, Legend Holdings and China Oceanwide represents WeWork’s promising expansion into Eastern markets. Apart from its Asian investors, Western companies like Goldman Sachs, J.P. Morgan and T. Rowe Price have also invested in the Manhattan-based WeWork.

How does WeWork make money?

In a nutshell, WeWork rents buildings from property owners at one price and then rents them out to clients at higher prices. Not all of the locations WeWork uses are similarly priced; buying up real estate in Baltimore or Nashville, for example, is cheaper than New York City. These price discrepancies help keep WeWork's overhead from getting too high.

After renting the buildings, WeWork transforms them, updating everything inside and adding features like cafés, offices, and community spaces. Once finished, the company rents out the spaces for significantly higher prices. Apart from making money on rent, WeWork also provides additional services for a fee, such as partnerships with local businesses and car rentals.

What are the financial risks of WeWork’s business model?

WeWork pays the landlords a huge amount of money and sinks even more into cosmetic updates, so it relies on the revenue from renting to its clients to cover its high costs. If a location does not onboard enough clients to fill the available spaces or if the client rent does not cover WeWork's own rent, the company finds itself in a risky position.

Already, WeWork has signed $18 billion worth of leases over the next few years and has committed to renting 14 million square feet of office space worldwide. The company has written off massive losses as the cost of massive growth and values itself at $45 billion. It's important to note that loss periods are not abnormal for startups, especially in the case of WeWork's unusual business model.

Why do landlords decide to take WeWork as a tenant?

It can be tough to understand at first, but think like a landlord and WeWork's model starts to make more sense. It's easier to have one contract with a single large company for a certain period than to find and lease to several different tenants for shorter periods, especially if the building is in a less popular area. Overall, the managing efforts and negotiation processes are much less troublesome with one tenant, and WeWork usually leases properties for 10 years. This takes less time and resources away from the building owner. WeWork has also garnered enormous media exposure by attracting young, innovative businesses and curating affluent clientele. WeWork's model bolster's the local economy by attracting complimentary businesses to it's ecosystem, and with that comes a higher property value (a building owner's dream-come-true).

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