When co-working giant WeWork raised over $400 million dollars in June from investors like Fidelity and JP Morgan, its valuation soared to $10 billion. In less than 5 years, WeWork has raised over $1 billion in funding and grown to 56 locations in 17 cities. Urbanization, the tech boom, startup growth, faster internet speeds, better collaboration tools for remote workers–these are the forces driving the growth of the co-working market. But in a space first defined by the recovering Regus, and supported by marketplaces like Craigslist and PivotDesk, WeWork has stood out. At least in the eyes of investors.
How?
BuzzFeed News dug deep into the data, assumptions, and projections WeWork used to sell investors on their story and how it’s different from your mother’s sublease. And from that analysis these 5 factors, well, bubble up to the top:
[1] Go really, really big, or go home
Most startups tend to view the future in rose-colored glasses. But as Eric Sussman–senior lecturer of accounting at UCLA–told BuzzFeed News, “They have extraordinary, hockey stick–like projections. Which in and of itself is not uncommon. But they seem very, very aggressive.” And some accounting decisions WeWork has made push expenses into the future and make rent look lower in the beginning.
[2] Get tons of help footing the CAPEX bill
WeWork’s status is, at least for now, a sort of self-fulfilling prophecy. The company’s reputation helps it drive hard bargains with landlords, and this fuels it’s growth, fueling it reputation. Specifically, landlords are starting to pay up to 75% of the build out and refurbishment costs.
[3] When your downside case looks like the other guy’s upside case
Whenever this market cools, WeWork’s occupancy rate will drop. The nadir defines WeWork’s downside case, and helps give investors an idea of the range of scenarios they’re buying into with those fat checks. Nothing fancy here, yet. But the numbers might be: WeWork estimates its occupancy in a down market to tank to 85%. That’s Regus’ occupancy rate… in an up market.
[4] Software is eating the world
As General Electric’s CEO Jeff Immelt is famous for saying, every company has to be a software company. His point was on operations. But in that vein, and particularly for a startup, there are other benefits to associating yourself to software: comparable earnings multiples and the impact the right comparison set can have on your valuation. And this is where the plot thickens. Landlords typically have an earnings multiple around 20x and Regus clocks in around 13x. When WeWork’s valuation was only $5 billion, word is their multiple was 100x. Seems silly high for a real estate company, but less so for a software startup (Facebook is ~100).
[5] Neverending stories are the best stories…
…and one trick ponies get boring in a hurry. For a highflying startup to break out of orbit–and hit a $10 billion valuation like WeWork–it needs to sell investors on success in today’s market, and in tomorrow’s. For WeWork, that means “disrupting” the apartment market in the same way it’s trying to disrupt commercial real estate. In fact, it appears WeWork’s CEO tells investors the the WeLive co-living product will, one day, be WeWork’s biggest business. WeLive is projected to be 21% of revenue in 2018 at $606 million for the year.
WeWork co-founder Miguel McKelvey proudly states that you won’t find any “soul-crushing acoustic ceilings and crappy gray carpets” inside at WeWork. If you dig, you will find lofty projections, careful accounting, and a grand vision. And it looks like that is what it takes to raise $1 billion over 5 years and carry a valuation of $10 billion.
