Update August 14th: The We Company has officially dropped its S-1 this morning. This analysis from earlier this year explored what we needed to see in the filing in order to feel comfortable with the company’s financial model and future growth potential. We will have much more to say about the We Company in the coming days (I am sure).
With news that the We Company (formerly known as WeWork) has officially filed to go public confidentially with the SEC today, there’s a big question on everyone’s mind: Is this the next massive startup win or a house of cards waiting to be toppled by the glare of the public markets?
No company I follow has as much polarized opinion as the We Company. And while the company will have to reveal at least some of its hand in its official S-1, my guess is that the polarization around the company will not be alleviated until well after it goes public, if ever.
The challenge with understanding its business is how much the details of each of its leases, real estate markets and tenants matter to its bottom line. We already know the top line numbers: the company had revenue of $1.8 billion in 2018, and a net loss of $1.9 billion that year. That led to the received opinion that the company has an extraordinarily weak business. As Crunchbase News editor Alex Wilhelm put it:
So what we can see is not a company that sells $1 bills for $.50. Instead, over the past two years, WeWork has sold them for a little less than $0.50. That’s a great way to grow, but a difficult way to reach profitability.
That would also explain why the startup’s biggest funder — SoftBank’s Vision Fund — got into a surprisingly public spat with its largest LPs over a massive new infusion of capital into the We Company.
If only this business were so simple though.
To understand WeWork’s economics, we have to comprehend the baseline unit economics of its individual office leases. Unfortunately, this is gloriously complicated. First, we need to understand the lease structure of a building — does WeWork pay a flat rent per month, or does its rent balloon in later years? Does it get improvement incentives that depreciate over time? Does it revenue share with landlords or have other performance-based language in the contract?
While we have a little leaked data to go on, my guess is: all of the above and more. WeWork now operates in hundreds of cities in dozens of countries. The real estate laws in each of these locales is different, and WeWork no doubt negotiated unique leases for each building it captured. Sure, it had a model/template for how it wanted to structure these leases. But at the end of the day, real estate deals are particular and not perfectly repeatable across hundreds of properties.
And so the first thing I would want to see in the S-1 is how its property profitability changes over the course of a 10-year, 15-year or potentially longer-term lease. If early buildings in WeWork’s network are insanely profitable, then that might lead us to conclude that its losses today are truly investments in growth for the future.
Of course, the We Company doesn’t have to offer those details, or enough details for us to make the right comparisons. What will be critical in this S-1 is to see just how much detail We Company feels it needs to offer investors in order to get the valuation it is looking for.
Some critics of the company like to make fun of its non-GAAP accounting line items that use phrases like “community-adjusted” that have no purchase in the financial world. The S-1 will reveal whether the core math of the company makes sense, based on how much non-GAAP adjusting the company provides in order to present itself in the best possible light.
While office leases is its core business, WeWork became the We Company precisely to encompass its growing ancillary businesses, including WeLive and WeGrow. Much like Lyft’s S-1, which (somewhat) hyped the other high-growth components of its business like scooters, it will be critical to pay attention to how the We Company presents these other revenue line items. Does it emphasize these line items as the future basis of the company, or are they more shrouded by the core office rental business? Reading between the line[ item]s will provide important detail on the company’s strategic vision beyond what it states in press releases and official statements.
Next — and yes, this is a personal interest of mine — I think it will be critical to understand how the company capitalizes its leases, how it handles anti-money laundering, and how it handles policy issues in the countries in which it operates. Real estate is a messy and occasionally corrupt business, and as WeWork has soared to become the largest landlord in New York City, its compliance and risk mitigation is extremely critical to its long-term sustainability as a public company. The range of disclosures here can be as simple as a short risk factor, to what I would expect to be something more substantial.
Finally, one polarizing topic among my financial analyst friends is to what degree competition can or cannot undermine WeWork’s fundamental business economics. The thinking goes that office space is office space, and while WeWork offers a certain branded experience, other shared workspaces like Knotel are getting into the market with their own brands, and it is nearly impossible to successfully differentiate these products.
Indeed, WeWork has attempted on numerous occasions to present itself as a technology business, although its revenues couldn’t be based further from software. As Jessi Hempel at Wired explained, using interviews with the company’s chief growth officer:
Over time, this could be a much bigger opportunity than coworking spaces, one in which everything WeWork has built so far will simply feed an algorithm that will design a perfectly efficient approach to office space. WeWork aspires to be the de facto source to which businesses will turn when they need help figuring out how to spend the least amount possible for an environment that will delight employees and entice new ones.
The question of competition and evolution looms over everything in the company’s forthcoming S-1. What I am looking to see is language that shows how the company can create clear differentiation in its core rental business, without resorting to hand-wavy algorithmic points. If it presents its case straight and faithfully, that would indicate that the company believes its business is solid. If it resorts to AI hocus-pocus though, expect the public markets to thrash the company much as Lyft has experienced over the past two weeks.
The key then to reading the company’s S-1 is simple: the more it reveals, the more it feels confident in its core business(es). The more it occludes, the more we should be circumspect about the trajectory of a company that loses more than one dollar for every dollar that it makes. It’s entirely reasonable for a company to be worth a lot even while it loses oceans of capital. But data is the only bridge over that gulf.