WeWork Faces Challenge Before IPO
The workspace provider seeks to avoid comparisons to rideshare firms.
By Steve Dudash
July 22, 2019
To see article at U.S News & World Report
THERE’S A LOT TO LIKE about WeWork, whose shared workspaces have the look and feel of a Silicon Valley tech firm, with modern, sleek designs, welcoming open spaces and even beer on tap. The nine-year-old company has led the coworking wave and rode the growth of the gig economy to a valuation of nearly $50 billion.
At the same time, WeWork, which recently rebranded as We Company, has given skeptics plenty of ammunition. Without a real estate portfolio of its own to lean on, WeWork, it could be argued, is nothing more than a glorified middleman, refurbishing large rental spaces and then leasing them out to entrepreneurs and other small firms in startup mode. Not only does this model have thin margins but it’s highly vulnerable to the ups and downs that influence the broader economy, just like any other real estate-based business.
More concerning, however, are the losses, which totaled almost $2 billion last year. The company’s cash hemorrhaging ways apparently spooked SoftBank, an early investor that reportedly backed off ambitious plans to provide as much as $16 billion in additional equity funding. Potentially putting more strain on its balance sheet are recent news accounts outlining WeWork’s plans to raise $4 billion in debt.
For a company that is reportedly on the brink of an IPO, these are huge challenges to overcome, evoking comparisons to Uber Technologies (ticker: UBER) and Lyft (LYFT), two other unprofitable companies that have made inauspicious public debuts in recent months.
To its credit, WeWork seems to appreciate the task ahead. It has begun to aggressively pursue higher-margin business service offerings, including human resources and information technology support, as well as health insurance. Furthermore, it is also in the process of building an enterprise-focused business line that will provide big companies like Sprint Corp. (S), UBS Group (UBS) and Amazon.com (AMZN) design, buildout and facilities management services.
These, of course, are significant undertakings. Services represented only about 5% of WeWork’s $1.8 billion in revenue in 2018, while membership fees accounted for almost all the rest. Can it grow this portion of its business fast enough to become profitable and provide value for would-be shareholders?
This will hardly be the first time a company has been forced to reinvent itself to remain viable. Remember when IBM Corp. (IBM) only sold computers? It successfully became a provider of business, tech and consulting services, even as few would argue that it’s as influential as it once was.
Microsoft Corp. (MSFT) went through a similar transformation when the influence of personal computers began to wane. Microsoft suffered through a series of missteps under former CEO Steve Ballmer, making a number of silly acquisitions and failing to appreciate (until it was much too late) how transformative the iPhone would be.
The company, though, has reinvented itself under current head Satya Nadella, who shifted Microsoft’s focus to the cloud, a steadily growing and highly profitable unit that has propelled it back to prominence, once again the largest firm in the world based on market cap.
Apple (AAPL) is the latest high-profile example. Facing slowing iPhone sales and an increasingly saturated smartphone market, it is attempting to stay ahead of the curve by shifting from hardware to services. That was underscored during the company’s “special event” in March, when CEO Tim Cook unveiled streaming, news and gaming services, along with a credit card. There was no mention of any hardware products.
By most accounts, Apple’s initial efforts are not off to a great start, with the news and video streaming options failing to excite consumers. But with billions in the bank and near unsurpassed brand loyalty, the company has time to get this transformation right.
WeWork doesn’t enjoy those same luxuries, so it must act fast. Its mission is equal parts clear and daunting: to establish long-standing connections with both its rent-paying tenants and enterprise customers. That’s how Amazon went from online bookseller, to a marketplace for nearly every imaginable good and service, to now the world’s foremost cloud-based platform through Amazon Web Services, which drives most of the company’s revenue.
Just as there’s no guarantee that the rideshare model will ever turn a profit – which is why Uber and Lyft are venturing into numerous other business lines – WeWork’s existing core business may never blossom. Therefore, were it to struggle to reinvent itself into a service provider, the company’s future is likely bleak, no matter what outside investor backs it, how much debt it raises or what kind of IPO it has.
