Is WeWork the most overvalued company ever?

Humans are obsessed with records — the fastest, strongest, most successful. How about this one? There’s a genuine argument that WeCo (better known as WeWork) may be the world’s most overvalued private company ever.

In January, Japanese investment giant Softbank invested another US$2 billion in the controversial co-working start-up, giving it a notional valuation of US$47 billion (in total, Softbank has invested around US$10 billion in WeCo). The US$47 billion valuation meant WeCo’s founder, Adam Neumann, briefly had a paper wealth of more than US$10 billion. However, speculation is mounting that WeCo’s mooted IPO is looking shaky (the company filed a prospectus in August), with a potential valuation of US$15-$20 billion. Softbank is now pushing the company to shelve IPO plans.

WeCo’s financial metrics make for a sort of financial snuff film. Execs had hoped the company would be profitable by 2019; instead, it lost US$2 billion. Even worse: it had a total revenue of only US$1.82 billion. So while it doubled in size, it spent more than $1 for every dollar it generated.

The company’s recent prospectus made for even worse reading, with operational losses for the six months ending June 2019 hitting US$1.37 billion, compared to revenue of US$1.54 billion. Even if you exclude all pre-opening expenses and new market development expenses, WeCo still burnt $745 million. WeCo tried to sell a “community-adjusted EBITDA” number to investors, who understandably, were not overly impressed.

WeCo is growing fast, with revenue doubling every year for the last five years. The problem is that revenue growth is meaningless if it’s being subsidised by foolhardy investors. There’s a real question to be asked if the unit economics of WeCo actually make any sense — especially in a falling real estate market. Why is a real estate leasing business being treated like a tech company simply because it has lots of tech tenants?

There’s also the notion that WeWork charges a significant premium over almost all of its competitors for the cool stuff it does for tenants. Those built-in kombucha taps, free beer, and yoga classes don’t come cheap. Ultimately, WeWork has a great product but it’s not that much better than lots of other co-working spaces. And it’s not exactly like there’s a material barrier to entry. The only economic value WeWork has created is a well-known brand around fun; it’s hard to point to any genuine competitive advantage the business has. A recent report seems to confirm this, noting that prices for co-working spaces in Australia dropped by 10% last year, spurred by increased supply.

Meanwhile, Neumann’s so-called adjacencies appear to be little more than thought bubbles. First, there’s WeGrow: the school which was created because the Neumanns couldn’t find a school for their kids in New York. It doesn’t seem to have caught on, given its website shows only one location. Then there’s WeLive (fully-furnished apartment rentals). WeCo predicted WeLive would have 69 locations by 2018; it’s now 2019, and it only has two.

It appears WeCo is really a one-trick pony, and the one trick ain’t that good.

There are plenty of other concerns about WeCo that go way beyond its business model. Neumann carries his own baggage. Earlier this year, WeCo signed off on a US$5.9 million payment to Neumann for the right to use the “we” name in his own company. Neumann thought it would be good governance to keep ownership of the name for himself, and was widely criticised; the only logical purpose of such a move would be to extort a future owner of the company. Neumann (who was, on paper anyway, worth more than $10 billion), belatedly agreed to repay the money.

In June, New York Magazine’s Reeves Wiedeman gave readers an understanding of what WeCo is like, noting the company “earned an early reputation for having a partylike atmosphere thanks to free-flowing beer kegs, and the corporate environment was no different”. “One former employee says Neumann offered her tequila during her job interview,” he went on, “and liquor was a constant presence at pretty much every company event.”

Neumann may not have created a sustainable business, but he has built the world’s greatest mirage. And while Softbank will no doubt continue to inject money to save face (it has to, or the business runs out of cash pretty quickly), it seems incredulous that public investors would be so gullible to believe that it could be worth hundreds of millions, let alone billions.

Adam Schwab is a company director and angel investor, and the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.