Behind WeWork’s Billion Dollar Valuation (RGU, BXP)

WeWork has more than created a buzz among New York City’s hot tech startups. The seven-year-old office space sharing company's valuation has soared over the past few years. The Wall Street Journal recently reported that SoftBank Group Corp. is investing $300 million in the firm, and $2.7 billion is expected to follow from its investment fund. Founded by Adam Neumann and Miguel McKelvey, WeWork is valued at $17 billion, and after the total SoftBank investment, it may be worth $20 billion.

Since day one of operation, Neumann says WeWork has been operating cash flow positive. Many valuations are based on cash flow multiples. WeWork generates profit through month-to-month memberships, ranging from hundreds to hundreds of thousands in fees, depending on the size and needs of the company. WeWork enters into long-term leases with landlords and offers spots in their hip office spaces at a markup. Moreover, by partnering with third party providers such as Chase, WeWork offers services such as health care and payments processing at a competitively low cost to members. 

WeWork also has developed a form of capacity utilization by leveraging a community atmosphere. Face-to-face interaction between small businesses and entrepreneurs helps members solve each other’s problems, team up for projects, and share physical and human capital. This comes at no cost to WeWork. In fact, it may be the business’ most valuable asset.

When asked if WeWork is a "unicorn," founders object, saying that they don’t rely solely on the economy. They disagree that the valuation is inflated. Instead, they project to grow by thriving off of a shift in humanity, unhindered by business cycles or investors’ speculations. (For more, see: Are Tech Startups Overvalued?)

Since the company rents out long-term leases to its members, they risk being stuck in a costly situation if demand were to sharply decrease. Many argue that WeWork would endure the same hardship as office sharing companies HQ and Regus (RGU), which struggled with the dotcom bubble. Both HQ and Regus filed for chapter 11 bankruptcies. Regus subsequently bought out HQ, and is now trading at about 80% of the value of the stock fifteen years ago. However, it may surprise skeptics that WeWork continued to grow even throughout the real estate bubble burst in the late 2000’s. 

WeWork’s management says they maintain a cushion in the event of a downturn. They attribute this to their streams of revenue from various supplemental service offerings.

Some are weary of WeWork’s prospects in the event of a tech bubble, since they say WeWork attracts many venture-backed startups. If the money dried up, WeWork may lose a majority of its customer base. However, WeWork’s members range from large companies, lawyers, independent freelancers, to yes, early stage tech startups. The company has raised $3.7 billion over ten rounds. Most recently was SoftBank's $300 million, which is believed to be the first installment of a $3 billion investment. According to CNBC, the investment would value the company at $20 billion.

WeWork leads amid rising consumer office space companies in New York City, and WeWork offices continue to open throughout the U.S. and globally. Neumann suggests that WeWork is not only competing with other co-working spaces, but also competing with offices. WeWork’s growth relies on the “We Generation.” This generation believes in the sharing economy and that they can believe in what they are doing for work.

According to a September 2016 survey by the Freelancers Union, freelancers comprise 35% of the U.S. workforce, or 55 million Americans. 

WeWork is a "unicorn," confirmed by Fortune's Unicorn List. It's private companies, usually in tech, valued at $1 billion or more — WeWork is valued at approximately $16 billion. Many are expecting an IPO in 2017.

At $17 billion, WeWork would be the fourth-largest publicly traded office landlords. Boston Properties (BXP) leads with a $22 billion market capitalization. 

WeWork is a market challenger, entering a market saturated with shared office companies. When Neumann and McKelvey launched their idea, they started as Green Desk, a green company-oriented shared office space. However, founder’s say saw an opportunity for a bigger idea, a bigger brand. By leveraging community, WeWork aims to do more than a real estate company, creating an experience that helps small businesses thrive and succeed.

Much of the success can be attributed to the tech orientation of the company. Technology leads information and decision making processes. Behind the scenes, a system is in place for choosing offices, while a live 3-D modeling system works to design the buildings to increase the chance of interaction. Zendesk (ZEN) software runs ticketing and ensures quality service, while their social app connects members virtually.

Investors are also confident about WeWork’s leadership. Management looks for “the right people” through a thorough interview process. They make sure employees are connected to their work, offering equity compensation to every employee, even the cleaning staff.

The newest aspect of of WeWork is WeLive — a disruptive, shared housing company — where members have access to short and long term housing with access to yoga studios, rooftops, hot tubs and everything in between. So far WeLive is only available in New York City and Washington DC.

Although going public may be in the near future, there no concrete time frame has been stated. Neumann suggests that an IPO should not be thought of as an exit, but as a next step in the life of a company. We can be sure that he and McKelvey will continue to drive the direction of WeWork throughout this growth.

A few years ago Neumann gave his Twitter followers a taste of WeWork's expansion strategy, specifically that it would not be simply moving to larger cities, but rather to “high IQ cities that have the We Generation in them,” such as Austin, Chicago and Berlin. Today WeWork can be found in 39 cities in 15 different countries, including the U.S., Israel, Argentina and the Netherlands.

Neumann and McKelvey have persuaded investors, and WeWork members, that how and where we work will continue to shift. A $10 billion valuation relies on the growth of a global “We Generation,” a group that understands the sharing economy, and that by leveraging community, one can become more successful both financially and emotionally. Their model is a differentiator, selling an environment that empowers people to do what they love, through a genuine and honest company culture. This and the company’s revenue cushions, growing market, and tech focus should outweigh the negative effects of any tech bubble or economic downturn.