6/27/18

The WeWork Business Model

WeWork has been at the forefront of the shared workspace industry and quickly became the driving force. Who are the investors behind WeWork? Does WeWork make money at all - and if so - how? What are the financial risks associated with WeWork’s business model? Lastly why do landlords decide to take WeWork as a tenant and not lease it to a company directly? Let’s quickly take a look at all these questions. Before that, for the ones not familiar with WeWork, quick overview and then we’ll dive right in.

What is WeWork?

WeWork is a company founded in New York in 2010 that offers coworking spaces to entrepreneurs, startup companies, freelancers and larger entreprises  . WeWork has been growing at a high speed ever since its establishment, it is one of the largest coworking space chains in the world. It now has more than 2,000 employees and locations in 23 United States cities and 21 countries including Australia, Argentina, Brazil, Canada, China, Colombia, France, Germany, Hong Kong, Ireland, India, Israel, Japan, Mexico, Netherlands, Peru, Singapore, South Korea, Spain and United Kingdom.

Who are the investors behind WeWork?

The top investors of WeWork are:

Wework investors
Top Investors of WeWork

In 2017, WeWork got an enormous amount of $500 million from the following investors: Hony Capital, the Japanese internet giant SoftBank, Greenland Holdings, and China Oceanwide. Less than a months later, in August 2017, SoftBank Group and SoftBank Vision Fund poured a massive  $4.4 billion investment into WeWork. The $4.4 billion was broken down to $3 billion  in WeWork itself, namely through primary investment and secondary purchase of existing shares. The rest of the  $1.4 billion is planned for WeWork’s expansion in Asian market-  WeWork China, WeWork Japan and WeWork Pacific. As of 2018, WeWork has raised nearly $7 billion in private-equity and venture capital funding since its 2010 founding.

The immense funds by Asian companies such as Hony capital, Legend Holdings and SoftBank shows WeWork’s promising expansion in east part of the world. Apart from the Asian investors, Western big banks such as Goldman Sachs are also investing in this young Manhattan-based company. Goldman Sachs and JPMorgan put over  $350 million into the startup at a $5 billion valuation.

As of August 10th this year, WeWork announced that it has raised yet another $1 billion from SoftBank. The vast amount shows the confidence of investors, and it is well-deserved: WeWork revealed an increase of 6% in occupancy rate, reaching an impressive 84%.

Does WeWork make money at all - and if so - how?

In a nutshell, WeWork rents buildings from property owners at one price, and rents it out to clients at higher prices. Some of the buildings WeWork rents are under used anyways, therefore the rent is even lower than at popular areas. After renting the buildings, WeWork transforms them, redesign them and add features such as cafe, kitchen, ping pong table, and rents the spaces out for significantly higher prices. Apart from making money on rent, WeWork also provides additional services to gain profits, such as partnership with local businesses, community benefits, car rentals, etc.

What are the financial risks associated with WeWork’s business model?

To begin with, WeWork is paying the landlords a huge amount of money. The revenue obtained by renting to its clients will hopefully cover its cost. With that being said, if WeWork does not get enough clients to rent its spaces, or if the rent is not covering the cost, the company is at a risky position. This is true at the scenario in London, UK. WeWork launched coworking spaces in the UK in 2014 and ran at a loss since it was renting the spaces out for lower price than it was paying the landlords. Between October 2014 and the end of 2015, WeWork gained revenue of £13.6 million and total cost  of £18.3 million, with a net loss of £14.4 million

However, loss-making periods are not abnormal for new businesses, especially in this case when WeWork was establishing its first locations and operations in Europe. The company needs to set up the location, hire new staff and involve other costs before finding new clients.

Why do landlords decide to take WeWork as a tenant and not lease it to a company directly?

For landlords, it is easy to have one  contract with a single large company for ten years, than to have several different tenants for shorter periods. Overall the managing efforts and negotiation processes are much less troublesome with one tenant. Apart from the simplicity, the reputation of WeWork also makes property owners willing to lease their buildings. As a fast growing startup, WeWork gained enormous exposure in the media, this adds to the value of the properties they are renting. Finally, some of the properties are located in lesser popular areas, landlords in such districts find it smooth to lease their buildings to a reputable company for long period of time.

What is WeWork’s deal with their landlords?

Wework leases buildings from property owners, usually for ten years and start transforming the buildings and designing them smartly. The buildings are subdivided into smaller fractions of various sizes and functionalities to accommodate clients of various sizes and needs.

The long-term contract pressure is therefore not on the clients, instead Wework is taking on the responsibility with long-term contracts with property owners.  

What are the membership options?

Flexibility is the key in Wework’s business model. Four major options are provided to best suit different businesses’ needs. The membership fees is the major source of revenue for Wework.

Custom Buildout

This option presents maximum freedom for those who want to customize their workspace to achieve highest level of efficiency and comfort. From CEO suites, conference rooms, auditoriums to labs, the choice is limitless. Wework will scout the building and transform it according to client’s needs with smart designs. Clients include Facebook, Microsoft, HSBC, Deloitte etc. Pricing varies depending on the specific demands. 

Private Office

These fully furnished, move-in ready offices are an optimal choice for companies seeking privacy and start working immediately. The private offices are equipped with office furnitures and customizable to fit teams of size from 1 to 100+. Price starting at $450/month. 

Dedicated Desk

This plan offers dedicated desk desk that allows clients to work at the same spot permanently. For those who want the opportunity to be social at work and share creative ideas, but also want a desk of their own, this is the perfect solution. Startups and small agencies usually find this the convenient option for them. Price starting at $350/month. 

Hot Desk

The most flexible access to coworking spaces, this option gives workers the opportunity to pick a primary WeWork location, show up whenever they wish, pick any available seat at common area and start working immediately. Flexibility and affordable cost are important for part-time and remote workers. Price starting at $350/month.

Apart from the flexibility and possibilities it provides, Wework’s business model works also because everything is taken care of and clients do not need to worry about anything apart from paying for the membership. Wework gains revenues from the membership fees. The fees are all inclusive of tasks from filling the ink of the printer, paying utility bills to taking out the trash, Wework fixes those errands for their clients so the time can be saved and used for working.

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