Frankly, there is a lot to like about the WeWork opportunity. Yes, a $47 billion valuation seems way too high, particularly given the fact the company is on pace to make only about $440 million in gross profit this year (i.e. excluding all buildout and corporate costs), and given the huge recession risk. At the same time, this is a real business that provides real benefits to companies of all sizes, and those benefits are only growing as the nature of work changes to favor more office work generally and more remote work specifically. And, critically, there is no real competition.

The problem is that the “unsavoriness” I referred to above is hardly limited to the fact that WeWork can stiff its landlords in an emergency. The tech industry generally speaking is hardly a model for good corporate governance, but WeWork takes the absurdity an entirely different level. For example:

WeWork paid its own CEO, Adam Neumann, $5.9 million for the “We” trademark when the company reorganized itself earlier this year.

That reorganization created a limited liability company to hold the assets; investors, however, will buy into a corporation that holds a share of the LLC, while other LLC partners hold the rest, reducing their tax burden.

WeWork previously gave Neumann loans to buy properties that WeWork then rented.
WeWork has hired several of Neumann’s relatives, and Neumann’s wife would be one of three members of a committee tasked to replace Neumann if he were to die or become permanently disabled over the next decade.

Neumann has three different types of shares that guarantee him majority voting power; those shares retain their rights if sold or given away, instead of converting to common shares.

Eoin Treacy's view

WeWork by all accounts creates spaces where people might actually want to work. That’s no mean feat. It’s not cheap but it is laudable. I spent a couple of days a week popping in and out of the Luxembourg Regis office between 2000 and 2003 and it was a pretty grim experience despite the prime location on Boulevard Royal. I would never have volunteered to work there full time if there was a better alternative available but it was, and probably still is, expedient for Bloomberg to maintain a satelite office there. 

The fact they are doing so at a time when real estate prices in some of the world’s most desirable cities are at record highs suggests it is a strategy that comes with risk. The only way a valuation rationale for a company like WeWork makes sense is in a negative yield world. The constant spend on new real estate and marketing is predicted on constant growth and limitless availability of funds.

If the IPOs of other similar high spend companies are any guide, the initial valuation at the market will be given a significant haircut by the market.