Venture Growth and Development

WeWork Case Study Analysis

Herve Kubwimana

Cardiff Business School.

1. Introduction

In this essay I am going to interpret venture growth and development success using the case of

WeWork─ a 6 years old American company that provides shared workspace and apartments in around

60 locations across the world. We will start by giving the company’s overview and the people behind

its success as well as its business model. Then I will progress by exploring its growth context by trying

to understand how a company that didn’t exist 6 years ago has succeeded in creating the hype in big

cities revolutionising how people work. In this section we will explore how WeWork became a category

creator. Thirdly, we will review WeWork’s future trajectory by looking into its revenue generation and

its market valuation but at the same time identifying the challenges that are ahead of the company.

This section will also make a comparison of WeWork to other highly valued companies and seek to

understand what makes them so interesting to investors. We will close by exploring what is next for

WeWork 3-5 years ahead. During our work, we will base on authoritative business, financial, and

strategy online newspapers articles.

2. Company Overview: WeWork

WeWork is an American company which provides shared workspace, community, and services for

entrepreneurs, freelancers, start-ups and small businesses. Founded in 2010 by Adam Neumann and

Miguel McKelvey, (Appendix A) and it is headquartered in New York City. (WeWork, 2016)

Business Model WeWork targets members coming from different industries but technology companies occupy the single

largest industry with around 20% of its clients. These members join WeWork after leaving a variety of other workplaces including home (41%), other coworking spaces (19%), dedicated offices (15%),

company offices (10%) and coffee shops (6%). WeWork attracts them using a business model that is

built upon on three pillars: space, services and community. (WeWork, 2014)

Space: As of December 2015, WeWork had 60 coworking locations in across the U.S., Europe

and Israel – twice as many as it had at the end of 2014. (Fortune, 2015). Each location is populated with members, who pay a monthly fee to access the platform. To establish locations,

WeWork enters into long-term lease agreements for centrally located commercial office spaces

and transform them into thoughtfully designed kitchens, lounges and meeting spaces that are shared among members. These feature high speed internet, printers and copiers, meeting

rooms offices suppliers, etc. all included with the membership averagely price at $600/member/month. (WeWork, 2014)

Services: WeWork leverages its 40,000 community members to partner with established

service providers to offer its members access to essential business services as health care, payment processing, IT support, payroll, and legal services. It negotiates below market rates

for members while securing a revenue or profit sharing arrangement with the service provider. This model benefits everyone as members receive high-quality affordable services, service

providers get a powerful distribution channel and WeWork earns revenue without the challenges of product development, inventor and overhead.

Community: WeWork hosts hundreds of events each month including product demos,

member panels, guest speakers and happy hours. WeWork has engaged up to its 40,000 members who connect and network through its mobile application. As the community grows,

the value also increases by sourcing talent, projects, referrals through the ecosystem and this has resulted in an increasing demand for WeWork space with minimal spending.

3. WeWork’s Growth Context

WeWork was launched during a downturn of the global economy which allowed the company to sign tenant-favourable leases in world class locations and assets. (WeWork, 2014). WeWork entered the

New York market at an opportune moment, when the economy was beginning to recover. (Rice, 2015).

During this time there were empty buildings as most companies were struggling, thus cutting on

expenses. Whilst WeWork entered the real estate industry, it quickly positioned itself as a category creator by

filling needs that consumers hadn’t realized they had. Research shows category creators are either solving new problems that can’t be solved by existing solutions or cultivating large and active

ecosystems. (Harvard Business Review, 2016). In the case of WeWork, there was a new generation of

freelancers and entrepreneurs or starting companies working from home which meant loneliness and no human contact and it was difficult to make personal connections when working in isolation (Rice,

2015). These start-ups needed each other as they feed off each other and want to belong to something. WeWork understood it and exploited it by providing a platform to work from that also serves as a

community of like-minded professionals to belong to.

Although companies can create new categories through new products alone, they’ll have better chances of success if they also create a new business model. (Harvard Business Review, 2013). This is how

WeWork positioned itself as a category creator in the office real estate industry:

Breakthrough Product Innovation

A Better Experience to members

Flexible membership for people on the go.

Network with like-minded entrepreneurs Promote services and find new clients

Search for business and service listings that can help your business grow

Benefit Enhancement

Big-company benefits and perks, no matter the

size of the team

Discounts on meaningful services such as

healthcare, web hosting, gym memberships,

travel, payment processing, HR solutions, etc.

Price and Value Innovation Rent at $45/mo for full access to the benefits of

membership with flexible access. Rent at $350/mo for 24/7 access to a dedicated

desk or private office for teams.

Breakthrough Business Model Innovation

Production Model

Take long-term leases with property owners guaranteeing up to 1 year free rent

Revamp the office and create a coworking space for many people

Distribution Model Offices in 60 coworking locations in across the

U.S., Europe and Israel

A digital app that lets you connect and work

virtually with other members around the world Events - formal and informal - to encourage

connections

Profit Model

Members’ monthly fees to access the platform Negotiating below market rates for members

while securing a revenue & profit sharing arrangement with the service provider.

Research has shown that within the 100 fastest-growing U.S. companies from 2009 to 2011, 13

companies (Appendix B) that were instrumental in creating their categories accounted for 53% of

incremental revenue growth and 74% of incremental market capitalization growth over those three years. (Harvard Business Review, 2013). Now WeWork is the fastest-growing lessee of new office space in New York and the US as it spreads

to cities such as Austin and Chicago, not to mention London, Amsterdam and Tel Aviv. (Konrad, 2016).

Over the past 12 months the company has tripled its membership from 14,000 to 40,000 and expanded to 60 locations from 21 today and 9 just 2 years ago.

For a business that doesn’t own any properties, this shows us clear strategy to exploit market

opportunities. There is an increasing change on ways people live and work especially millennials. Their decisions are now mainly based on convenience, experience and value for the money. This is also one

of the reasons sharing economy companies such as AirBnB and Uber have gained momentum.

Millennials value platform that allow them to connect with each other and they just want access over

ownership which WeWork sorted out and offer to its customers instead of being just another landlord. WeWork didn’t invent co-working but it was a fast follower and understood that the demand for office

space will go very high especially with the rising number of freelancers, contractors and entrepreneurs that are almost of a third of the labour force. (Parietti, 2015)

Here we also identify WeWork’s strategy of using agglomeration economies by expanding to cities that are considered as innovative clusters. Freelancers and entrepreneurs love these places as they offer

knowledge spillovers, specialised skills as well as backward and forward linkages. By offering to its members access to essential business support services; WeWork effectively create a supportive and

appealing environment to its members and this attract more members. This not only create economies

of scale for WeWork but also occasions internal economies of scales for its members and their start-up companies that grow at same time by taking advantage of this clustering.

At a pick of its growth, WeWork’s ambitions didn’t end at the office. Later in 2015 the company launched

WeLive─ a total immersion product that combines office space and micro-apartments. (Rice, 2015). Once again WeWork is exploiting another opportunity in the market: it is targeting office blocs and

shopping malls that have been abandoned by the defence industry hit by the crisis; convert them into

micro apartments in cities like New York and D.C where tech, advertising, media and internet employers are recruiting extensively but struggling to find affordable housing for their staff.

The initial thought behind WeLive was to include housing space and WeWork office space in the same

building. Borrowing notes from WeWork's idea that collaboration between neighbouring entrepreneurs

happens due to wall-free proximity, the WeLive apartments might foster a sense of community that urban living lacks. (Parietti, 2015). This is a very interesting proposal for the freelancers living in big

and expensive cities: their workday increasingly become longer and longer and making it easier for them to have a work-life balance at the same time eliminating commuting looks very appealing.

4. WeWork’s Future Trajectory of Growth

WeWork made a $75 million in revenues with a $4.2 million in profits in 2014 and the company is

projecting operating profit of $1 billion by 2018 on revenue of $3 billion. (Gelles, 2015). This puts the

company on the same level as big commercial landlords such as Boston Properties─ the largest real estate company. WeWork, which has raised $969 million (Appendix C) in funding at a $10 billion

valuation later last year, is the 11th most valuable start-up in the world. (Kosoff, 2016). This huge valuation makes differentiate the company to its main competitors including Regus─ that went bankrupt

in 2003 before getting on track again. It also puts the company on the same level as other sharing

economy tech companies such as Uber and AirBnB that are revolutionising the way people use transport and travel respectively.

However, WeWork presents a few risk especially considering its industry:

For all the hype, WeWork operates a fairly traditional real estate business: leasing office space,

redesigning it, and subletting it to tenants, often on monthly contracts. Its main rival, Regus, has been doing the same thing for 26 years — and knows that this model might work well

when the tech industry is booming, but carries significant risks. (Nicolaou, 2016). Like WeWork, Regus expanded rapidly during the dotcom boom, but went bankrupt in 2003 after the bubble

burst and its tech customers pulled out. It has since diversified its tenants and taken on more flexible leases to prevent a repeat. (Nicolaou, 2016). While WeWork’s long term leases protect

it if rents rise, some investors are worried that if the market faces difficulties, WeWork’s

finances would be in jeopardy.

Also, if revenues don’t rise astronomically as projected, if demand slumps, or occupancy levels

drop, the story could be different. (Lee. 2015). Most of its clients are tech start-ups and if the markets slow down, they will be unable to raise funding, thus unable to pay the rent. (Kosoff,

2016). For instance the company estimates that small and medium enterprises─ which it

targets─ to have 12 million potential members only in the US and aim at 1% (120,000) of this market which would generate $1 billion in annual sales. This means that WeWork needs to

diversify its client base and include more corporate companies as clients.

As discussed above, whilst the company is looking promising as ever and with the model of

sharing economies, it needs to diversify its clients and target more corporate clients. The challenge with this is that, as the company start to tap into corporate markets─ which it has

already started with companies like Merck, Pepsi and American Express being its tenants─ it risks to dilute its cultural balance and over-extending itself. As of now, it is still at a manageable

enough size that it can tend to its brand and maintain high levels of customer service. Hiring

the wrong community managers or automating too much would dilute its culture and cost the business too much. (Konrad, 2016).

The speed at which companies like WeWork─ that didn’t exist 10 years ago─ are growing is an example

of how valuation is skyrocketing with start-ups. This can be explained by the fact that these start-ups

are in a race to find new niches creating entirely new categories of products or services in order to fill needs that consumers hadn’t realized they had. In fact, as shown above WeWork came at the time

where companies were downsizing after the financial crisis and where most people were becoming entrepreneurs and freelancers. It took advantage of renting properties below market rates, revamped

them and rent them to a niche of freelancers and start-ups that don’t want to work from their homes

or coffee shops and that need a likeminded community to belong to.

Building on the category creation argument, we see another pattern of the meteoric rise of these so called “unicorns”—private, venture-backed companies valued at a billion dollars or more. It is due to

the highly competitive market of Venture Capitalists that are pumping funds to get in on the next Facebook or the next big thing and that is how an online grocer like InstaCart or WeWork can have

billion-dollar valuations. (Solomon, 2016). And the message is clear: category creators experience much

faster growth and receive much higher valuations from investors than companies bringing only incremental innovations to market. (Harvard Business Review, 2013). Research shows that that investors are overpaying for equity in these so called “unicorns”, thereby

inflating their market caps. Many venture capitalists try to grow their companies quickly in order to

raise as much capital as possible. (Harvard Business Review, 2016). If we compare WeWork to Uber or AirBnB, we find that they have all raised more capital than their cash flow statements and Profit & Loss

accounts suggest is needed. (Harvard Business Review, 2016) But unlike Airbnb and Uber, WeWork incurs large fixed expenses, in the form of leases paid to building owners or in revamping real estate

properties when expanding to new places.

With its growth, will WeWork go public? The company’s founders have given the prospect of an initial

public offering some thoughts for the next two to three years but they remain tight-lipped on the topic. (Konrad, 2016). Research has proven that fast growing companies that go public between the ages of

6 and 10 years generate 95% (Appendix D) of all value created post-IPO. It also shows that Start-ups have been in no rush to go public, preferring to take advantage of plentiful private capital from hedge

funds, mutual funds, and corporate VC firms. Public investors want to see some upside, so if unicorns

remain private through too much of their growth phase, they may never conduct a successful IPO. (Harvard Business Review, 2016).

Considering the rate at which WeWork is growing and if it is to sustainably expand and venture into

the apartment business, it might not be a bad idea to contemplate going public whilst the company is

growing rapidly. Research shows that many fast growing start-ups are missing their chance by staying private too long. (Harvard Business Review, 2016).

5. Conclusion

In this essay, we have introduced WeWork─ a New York based Concept Company that offers coworking

and co-living options to millennials that are freelancers, self-employed and contractors in big cities where rent is expensive. We have identified how WeWork placed itself as the company that understands

the needs of freelancers that were working from home and that wanted personal connections,

communities and an ecosystem to belong to. This lead us to question is exponential growth and valuation and made us explore the reason behind it, the challenges ahead and think of what the future

looks like for WeWork.

6. References

Fortune, (2015). Adam Neumann. [online] Available at: http://fortune.com/40-under-40/adam-

neumann-1/ [Accessed 18 Feb. 2016].

Gelles, D. (2015). At WeWork, an Idealistic Start-Up Clashes With Its Cleaners. [online] Nytimes.com.

Available at: http://www.nytimes.com/2015/09/13/business/at-wework-an-idealistic-startup-clashes-

with-its-cleaners.html?_r=0 [Accessed 1 Mar. 2016].

Harvard Business Review, (2013). Why It Pays to Be a Category Creator. [online] Available at:

https://hbr.org/2013/03/why-it-pays-to-be-a-category-creator [Accessed 3 Mar. 2016].

Harvard Business Review, (2016). How Unicorns Grow. [online] Available at:

https://hbr.org/2016/01/how-unicorns-grow [Accessed 1 Mar. 2016].

Konrad, A. (2016). Forbes Welcome. [online] Forbes.com. Available at: http://www.forbes.com/sites/alexkonrad/2014/11/05/the-rise-of-wework/#3b509a8d28c1 [Accessed 28 Feb. 2016].

Kosoff, M. (2016). How WeWork became the most valuable startup in New York City. [online] Business

Insider. Available at: http://uk.businessinsider.com/the-founding-story-of-wework-2015-10?r=US&IR=T

[Accessed 1 Mar. 2016].

Lee, A. (2015). WeWork’s Gamble On Growth. [online] The Information. Available at:

https://www.theinformation.com/weworks-gamble-on-

growth?unlock=bf5776&token=a37772501e4e0075b9a7c4c646c271386343a275 [Accessed 18 Feb.

2016].

Nicolaou, A. (2016). WeWork seeks new lease of life for the office model - FT.com. [online] Financial

Times. Available at: http://www.ft.com/cms/s/0/bf6f6adc-3932-11e5-bbd1-b37bc06f590c.html#axzz40X5cDjtL [Accessed 18 Feb. 2016].

Parietti, M. (2015). Inside WeWork's 'WeLive' Concept | Investopedia. [online] Investopedia. Available

at: http://www.investopedia.com/articles/markets/120215/inside-weworks-welive-concept.asp

[Accessed 2 Mar. 2016].

Rice, A. (2015). Is This the Office of the Future or a $5 Billion Waste of Space?. [online] Bloomberg.com. Available at: http://www.bloomberg.com/news/features/2015-05-21/wework-real-estate-empire-or-shared-office-space-for-a-new-era- [Accessed 28 Feb. 2016].

Solomon, S. (2016). Throwing Money at Start-Ups in Frenzy to Find the Next Uber. [online] DealBook.

Available at: http://dealbook.nytimes.com/2014/12/16/throwing-money-at-start-ups-in-frenzy-to-find-

the-next-uber/?_r=0 [Accessed 1 Mar. 2016].

WeWork. (2014). Company Overview: Supplemental information. WeWork Companies Inc.

WeWork, (2016). Press, Media, Company News | WeWork. [online] Available at: https://www.wework.com/press?ref=ftr#company-info [Accessed 18 Feb. 2016].

WSJ.com, W. (2016). The Billion Dollar Startup Club. [online] WSJ. Available at:

http://graphics.wsj.com/billion-dollar-club/ [Accessed 1 Mar. 2016].

7. Appendices

A. WeWork Company information

Founders

Adam Neumann, Co-founder and CEO As an entrepreneur in industries ranging from apparel to real estate, Adam has been creating

companies in New York City for nearly 10 years. Previously, Adam was Co-founder of the co-working space Green Desk, which helped transform the DUMBO neighbourhood in Brooklyn into a hub for

small, creative companies. Adam also co-founded and ran Big Tent Inc., where he developed Egg

Baby and Krawlers, well-known brands of children’s clothing. (WeWork, 2016)

Miguel McKelvey, Co-founder and Chief Creative Officer Miguel directs all architecture, design and construction activities. He is a multi-disciplinary designer

and entrepreneur with diverse experience in architectural design, construction management and web development. Miguel earned his BA (Architecture) from University of Oregon. (WeWork, 2016)

Latest valuation: $10.0b (June 2015) Total equity funding: $969m

Valuation-to-funding: 10.3 to 1 Rounds of funding (current): 6

Location: New York, N.Y.

Founded: 2010 CEO: Adam Neumann (co-founder)

Competitors: Regus Investors: Aleph, Benchmark, Commonfund, Fidelity Management, Goldman

Sachs, Harvard Management, Jefferies Group, J.P. Morgan Chase, Rhone Group, T. Rowe Price, Wellington Management

B. New Categories, Outsize Growth (Harvard Business Review, 2013).

C. All Companies valued at $10 billion and above as of February 2016 (WSJ.com, 2016)

Company Latest Valuation

Total Equity

Funding Last Valuation

Uber $51.0 billion $7.4 billion August 2015

Xiaomi $46.0 billion $1.4 billion December 2014

Airbnb $25.5 billion $2.3 billion June 2015

Palantir $20.0 billion $1.9 billion October 2015

Meituan-Dianping $18.3 billion $3.3 billion January 2016

Snapchat $16.0 billion $1.2 billion March 2015

Didi Kuaidi $16.0 billion $4.0 billion September 2015

Flipkart $15.0 billion $3.0 billion April 2015

SpaceX $12.0 billion $1.1 billion January 2015

Pinterest $11.0 billion $1.3 billion February 2015

Dropbox $10.0 billion $607 million January 2014

WeWork $10.0 billion $969 million June 2015

D. Change in Value Since IPO