What WeWork's Worth
This episode of the journal is brought to you by linked in jobs linked in jobs through its six hundred million plus members to find the most qualified candidates for your job for fifty dollars off your first job post visit linked dot com slash journal terms and conditions apply. Only a few startups have ever reached evaluation of forty billion dollars. One of them was uber. Another was facebook but today the most highly valued startup in the u._s. It is an app or a social media platform. It's the week company aka. We were the hip glass-walled beer on tap co working space base. We work is now valued at forty seven billion dollars this fall we work as planning to go public which means that regulators liters investors journalists are all taking a hard look at its business model and its co founder adam newman and some people are alarmed by what they're seeing today on the show is we work worth as much as the tech world thinks it is and if it isn't what does that mean for all all of the other hot startups waiting to go public welcome to the journal our show about money business in power. I'm ryan knutson. I'm kate linebaugh. It's wednesday september four. I was quering commercial real estate in office face out of new york in two thousand thirteen and there was this trend where these co working spaces faces were popping up eliot brown covers startups for the wall street journal. There are a number of these and we were it was the biggest and so i wanted to meeting and they took a while but finally met down at <hes> in lower manhattan at their offices and sort of sit outside for a while and then get called in to meet adam newman who is the sort of long haired completely exuberant guy who didn't seem to know how to use his macbook and have to keep calling his assistant to show them how to show me a video and what what was on the video of their summer camp that they had just had <hes> where they invited all of their members up to upstate new york to <hes> hang out by the campfire and party and drink beer and sit under stars and there were lots of shots of him on a motorboat and you go into this meeting with him and for this from investors busters as well he just talks about the future in a way with such supreme confidence that you think it's actually going to happen. He has this really contagious. Teijin confident way of speaking about the company and its future adam newman started we work after after trying out a series of other business ideas which never really took off one person who he worked with said he was really really really incident money. Not i had an idea for collapsible. He'll for women's shoes which he didn't work then he tried to make a thing called crawlers which was is an outfit for toddlers padded knees so their needs wouldn't hurt okay as they crawl trying to solve problems trying to solve problems and while he was doing nat <unk> on the side he saw office thing which clearly had a lot more glamor to it in his mind and so that's when he left into nine or so from that to move into office land we work leases large office spaces and then carves them up so that multiple small companies or even individuals can work in a shared space we were then charges its tenants or members substantially more than it pays in rent and by doing so the company could in theory make a lot of money so very early on it was seen as something giant so he told people <hes> some of the first employees it's like one of them told me once you need to take this seriously because we are building. The next google we work wanted to be more than a real estate date company. It branded itself with a kind of tech company vibe busy one of the first things they said when i got up there was your real estate reporter. We don't think okay. This is a real estate. Story is there someone else who covers community and the changing social trends in cities and entrepreneurship and i said i'll hear you out still probably the guy who'd write it but why aren't you real estate company and so they were very sort of pushy on that point and actually i later eight or learned. They instructed their p._r. People to really push back against the notion that they were a if anyone call the nave real estate company it was using all this language of in the software world and they pitched themselves the physical social network and newman wanted to be even more than that they recently shared sort of some early napkin napkin drawings essentially from the time or it's like we'll go into we sailing <hes> we banking and finance entrepreneurs i it was sort of all over the map all under this the concept of we we works. I building was in soho in downtown. Manhattan newman renovated the space with a look that has become we works distinctive industrial style glass walls plants and a packed roster of events by two thousand twelve. We were had won. The backing of one very significant investor silicon valley venture capital firm called benchmark. They've been early backers and and things like ebay an uber in snap so so they've had a lot of hits over the years one of the atom in new york <hes> was really impressed by by his personality in the business but then adam came and met all the partners the benchmark and it was me as they were not nearly as interested in the business as they were in him as a person and just they saw he was this of energy and sort of check all of these silicon valley c._e._o. Uh-huh boxes what would those boxes be contagious energy vision of this sort of era of start up you know c._e._o. Or that they want to turn these little companies minnie's into multibillion dollar companies. They're looking for someone who can whatever happens. Whatever happens with the business by sheer will of force make a giant successful business and newman's timing was right. There were more people out there looking for smaller more flexible office space they had had stumbled on this geyser eiser of demand where they really like. We're opening and just feeling really quickly and there was something changing in in the economy or demand for office space where you'd open up these centers with these <hes> these locations with a lot of desks in sort of separated glass offices in the hip common space with arcade games and it is pretty unlike anything else is out there <hes> other than sort of office google after that first endorsement by benchmark in two thousand twelve. We were grew fast every year. The company vinnie was roughly doubling the amount of space. It was renting and the amount of revenue it was generating by twenty sixteen. We were had more than one hundred locations and it was in atlanta denver san diego berlin soul and mexico city and it wasn't just attracting freelancers and small startups. We work with signing up. Big name tenants like microsoft ibm amazon. There was so much enthusiasm that in two thousand eighteen one one company that had invested in we work softbank almost bought it but after taking a hard look at its finances the the people backing softbank got nervous and forced it to abandon the offer the deal never went through and big questions started to emerge merge about how we work was running its business. That's after the break. This episode of the journal is brought to you by linked in jobs linked. Does the legwork to get your job listing in front of the right people people for your company. They look for candidates with the right combination of hard skills and soft skills things like collaboration work ethic and adaptability for fifty fifty dollars off your first job post visit lincoln dot com slash journal. That's linked in dot com. Slash the journal to get fifty dollars off your first job post terms and conditions supply welcome back typically clearly tech investors seek out visionary founders and businesses with the potential to remake whole industries but wall street is more focused on a company's ability he to reliably make money and so this summer when we work announced his plan to go public wall street investors started taking a hard look at its finances and how adam newman was running the business one of the things they noticed was newman had been consolidating his power over the company so in late twenty fourteen what was happening was that's when money was really starting to pour into silicon valley and for the hottest tech companies the c._e._o.'s found they had an enormous norman of leverage and so back then what adam did he changed the makeup of the company so he now had full control roll over the company and its board essentially newman had found a way to make his vote more valuable than the vote of another shareholder that was really important because that makes it so it's no longer a board of directors <noise> the pennant and can make decisions but everything was really fully i it it became atoms company. That wouldn't be a big deal on its own but there were other things too. Adam did over the years a number of things where he had his own personal interests intertwined with those of the company company so one of the things that he did that. A lot of eyebrows is he bought a number of properties individually with his own money and the van lease them to okay. That seems unusual. Yeah it's quite unusual. I mean you know another theme is that adam has sold <hes> successively clean a number of rounds <hes> a hefty amount of shares in we work and raise a lot of money that way for himself 'cause you know he didn't have much money before and he was not independently wealthy but so the rising value of the private we work stock <hes> allowed him to cash out some ticks and chips off the table table and started living richer life. Is that unusual for founders to be cashing out during this period of growth. It's certainly unusual on the scale that he's done it which is very large loans. It's over seven hundred million dollars and that's the type of thing where are we couldn't find a precedent anywhere close to that point so not only was newman cashing out of we work as the company was growing and becoming becoming more valuable but he was also leasing his own personal property is back to we work that meant we work would pay rent to adam adam newman. He also did something similar with the name of the company that title the we company newman owned the trademark of the word word. We sold it to his own company for a value of almost six million dollars. Now we were defenders. Atoms defenders will say that nobody works harder for we work than he does and you know he took some of that money and actually bought more stock in the company vinnie and he's very much aligned with with the growth of we work <hes> but even so it just generally not seen as a great image that image wasn't helped by the fact act that we work was losing money. We work has actually never reported a profit and over time it was reporting bigger and bigger losses. We work is losing an enormous amount of money and they've really been increasing that basically the same rate that they've been increasing the money they're taking in and so you you know in two thousand eighteen for every dollar that they took in revenue they spent two dollars and <hes> that was also true in two thousand seventeen so so you know they they came out to one point nine billion dollar net loss which is a very large net loss for a company of of this age of of the size is not totally unusual for startups to be loss-making correct but very few of lost money on this type of scale the notion that that a a nine nine year old company should be losing two billion dollars a year is and that's normal is is incredibly new in all we again. We were burned through two billion billion dollars last year. Not only as we work losing a ton of money. There's another factor here which makes its business. Especially risky. We work work is locked into long term leases all over the world. The company usually signs tenure or even fifteen year leases for the office space. It runs but its customers. Customers leases can be as short as just one month so if we were loses a lot of customers or can't fill up the spaces it has it could get stuck paying a lot of rent. We work thinks of itself like a tech company. It uses that kind of physical social network language about itself but added core is doing something that companies have done for a while companies that are nowhere near as valuable companies like i w g which used used to be called regis regis now and we work have very similar business model and very similar amount of desks they they lease out we work is worth ten times what regis's so we worked with forty seven billion and reaches worth around four point six billion so these questions about we were particularly about valuation have dogged we work for a while and their response has always been very confident that the public markets let's will value them like something like netflix where what they're doing is they're growing so fast that that is what investors want and we're going to assign a really good valuation for companies that are growing really fast. We works valuation is about to be put to the test. The company is expected to go public in the next few weeks when it does it will be facing scrutiny from a much broader set of investors basically anyone who can buy stock doc and if it doesn't go well it raises deeper questions not just about we work but about all kinds of venture capital backed companies. There's a huge amount of the economy now or certainly the new economy. That's all based on the presumption that this new wave of startups is worth so much and you know uber it was spawning all sorts of other companies that mimicked it and said there the uber of dog walking because if uber is worth so much then surely do of dog-walking will be worth x and so you basically have a mini economy based on this expectation that these companies are worth a ton and if that ends up just being a house of cards or or you know flawed logic the then you have a huge amount of other companies that are going to have a lot of problems and we have seen this already this year right with uber and lift yes uber in particular was just by far the most hyped startup of the past decade so there was this enormous expectation for how uber was going to do and it flopped in the i._p._o. And it's fallen since and it's now a share an uber is worth less than it was in december twenty fourteen gene. I think this opens up a big question for the disconnect between the private markets and the public look markets so if wall street isn't buying with silicon valley selling that's a really big problem for all of these companies in silicon valley that are still private and worth gobs of funny ahead of we works i._p._o. And with all of the skepticism about the company we work is now making changes today in new paperwork filed for the i._p._o. It disclosed that it would undo that six six million dollar deal over the trademark of the word we <music> <music>. That's all for today. Wednesday wednesday september four hundred thanks for listening. We'll see you tomorrow.