My 10 Cents on the WeWork IPO – The “AWS of Commercial Real Estate” or a “Double Hype” ?
WeWork as the AWS of Commercial Real Estate
A lot has been written in the past few days about the upcoming WeWork IPO. I had linked to a few articles on Saturday and FTAlphaville has some pretty sarcastic but good coverage as well.
Yesterday then the always brilliant Stratechery came out with in interesting post. Ben Thompson thinks that WeWork could develop into something like AWS (for real estate) which now is repsonsible for most of Amazon’s profits. But he clearly acknowledges there are a lot of governance issues etc. etc. The “WeWork is like AWS” story is nothing new and is mostly pushed by WeWork itself and combined with what they think is the adressable market (hint: all commercial real estate globally) could justify almost any valuation.
WeWork’s actual product: Open Plan offices (for start-ups and wannabes)
What I have been missing in the whole discussion so far is a look at WeWork’s actual product which in my opinion is the following:
WeWork sells flexible but always very densly packed open plan offices with a “shiny surrounding”, i.e. a hip reception area and equally hip “common areas”. The common area usually includes free drinks (Coffee, nicely decorated water jugs etc) plus in some cases beer taps. Depending on the site, there will also be loud music.
Initial target Group: Start-ups
WeWork is popular for freelancers and especially startups because of the initial flexibility, i.e. you can start with a small team and then expand quickly if you hire more people. However what I have seen so far is that the initial “teaser” rates per seat get jacked up pretty quickly if the company grows and then a lot of the startups that I know move out to a cheaper location.
Another critical aspect fors startups in my opinion is that it is really hard to create a distinctive Coprorate Culture for a startup within a WeWork environment. I don’t know if anyone has actually done the stats on the success of “WeWork” start-ups vs. “non WeWork” startups but my guess is that the really successfull ones don’t stay too long in a WeWork environment.
However having (early stage) start-ups as your main clients posses another issue: You are dependent on the health of the overall Venture Capital ecosystem. If a lot of money flows in to VC funding, then there will be a lot of demand for WeWork.
As WeWorks capital intensive business model also depends a lot on the current glut of cheap VC money, WeWork in my opinion is “double leveraged” to the current boom of the VC sector. As long as this works it will be great but if at some point this could mean trouble (and far lower growth rates).
Second target Group: Corporate Start-up Wannabes
WeWork boasts that 40% of its “seats” are now rented by Corporate Clients which seems to prove their AWS ambition. However from first hand experience I know that there is one very simple reason why a lot of Corporates now use WeWork: They hope that their employees will suddenly become as creative and dynamic as start-ups if they just move them to a WeWork office.
Some very large Coporates tried to recreate “start-up atnosphere” on their own, but others are desperately trying to find a way to become cool again and think that putting people into WeWork Open plan offices will do the trick.
For big Corporates in my opinion the most important aspect of moving people into WeWork like spaces however is the following: They can actually show that they are doing something, both to their bosses but also to all other stakeholders. This is a lot easier than actually changing the culture or governance structure etc. Such a move usually comes after a “tourist visit” to San Francisco and Silicon Valley which often leads Coporate CEOs to believe that if the workspace looks like Google/Facebook/Apple, their old company will magically transform into a hip Tech Company.
Sooner or later however many will find out that just moving people into a hip office without actually changing Governance structures, incentives etc. will achieve absolutely nothing but I guess in the current hype cycle we haven’t reached the peak yet.
Another issue with this kind of clients is that when there will be a downturn, these kind of activities will be cut first from Corporates. We have seen this in the early 2000s and I will bet that this will happen again.
The Open Plan Office hype
This brings me to my final point of a prinicpal issue in WeWorks product offering: Open plan offices. Open Plan offices in themselves are a big hit with managements globally Basically they promise two great things at once. First, one saves cost as you can pack more employees into one space and second, open plan offices are supposed to create a collaborative and creative atmosphere all by itself.
Interestingly, especially in the last few months or so, more and more research has been released that actually proves the opposite. The HBR for instance has written about an interesting study which showed the direct effect of moving people to Open plan offices:
Overall, face-to-face time decreased by around 70 percent across the participating employees, on average, with email use increasing by between 22 percent and 50 percent (depending on the estimation method used),” says the British Psychological Society Research Digest blog, summing up the results.
On his blog, computer science professor and Deep Work author Cal Newport put those percentages into startling perspective. “To make these numbers concrete: In the 15 days before the office redesign, participants accumulated an average of around 5.8 hours of face-to-face interaction per person per day. After the switch to the open layout, the same participants dropped to around 1.7 hours of face-to-face interaction per day,” he writes. That’s an astonishing four hours less of collaboration per day.
Another nice story is the one about Apple Engineers who plainly refused to work at their Open Plan office in the new Apple HQ.
Personally, I made a very similar experience (which of course could create a bias). Moving from a single office (with open doors) environment into an open plan office still is an interesting experience. Although I have no statistics, I would agree that verbal communication actually decreased a lot. Most of the people are wearing Bose/Sony noise cancelling headphones in order to cope with the noise and in-office communication indeed mostly runs via Email /Chats (note to myself: Noise Cancelling headphones are a huge growth business).
Summary: A hype company with a hype product and not the AWS of Real Estate
In my opinion, WeWork sells a hype product with actual (mid and long term) negative productivity impacts for its Corportae customers and questionable impact on its original start-up customers.
This in my opinion is the biggest difference to AWS which clearly sells a product (secure cloud) that improves productivity a lot even for large Corporates.
So in my opinion the adressable market for WeWork is a lot smaller than they claim and even the existing business is double leveraged to the current VC boom. Maybe WeWork can pivot to a more AWS like product offering but doing a pivot at a 47 bn valuation is usually more risky than in an earlier phase of a company.
Before now everyone runs out and tries to short the hell out of WeWork after the IPO, one word of caution: It could easily be that WeWork floats only a small amount of stock compared to its market cap in the beginning. This could mean that for some time the stock price can clearly go to anywhere, especially if for instance Softbank wants to pump up the performance of its Vision Fund I until the end of the year. So I would recommend to sit back, relax and get some Popcorn instead 😉
Isn’t the main point that if it’s really such a great model there’s no barriers to entry, and if it’s not, well it’s not? And given the current cashflows more likely than not it’s the latter? I fully agree with you on the leverage to the VC model – but the problem with that is that with negative rates everywhere anything with a hint of growth (like VC) will get smothered in capital. I think the bigger picture one has to judge over the next decade is when people figure out the true value (even with negative rates) of growth in selling 50c for EUR1 – but that’s unlikely to happen overnight.
On shorting, one other important point that’s often missed in IPOs. Quite often shares in a privately backed company get reissued just prior to the IPO into a new “IPO”able class of shares. Under SEC rules old shares converting into such shares cannot be registered (and therefore trade) for at least 6 months after the IPO (this is separate to the IPO lock-up provision). But actually for insiders (i.e. people on the Board etc.) this period is 12 months. And then insiders are restricted to selling only during a trading window which opens up for a few days after results are announced, so actually it’s the first results date after the 6 or 12 month period that matters. Lots of schenanigans get played to make sure people aren’t insiders that are hard to track – e.g. VC partner resigning from the VC partnership but staying on the board of the IPO company in order to sever the link. Therefore tracking what % of the cap table is able to sell over time is non-trivial – yet lots of time it gets summarised as a simple “6 month lock-up”. All that said, BYND puts a few days before the first results after May next year are likely to be underpriced 😉
Didn’t understand a word
I used to work in an open plan office and it was aweful. We had to move all the time. I had to listen to a lot of conversations I didn’t want to listen to, And my productivity decreased because I got a headache at 1pm the latest every day. My basement is much better for programming 🙂