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Comment by justboxing | Hacker News Reader

Not trolling, really don't understand how WeWork is valued at 35 BILLION when they don't even own the real-estate properties that they are leasing.

How is this absurd valuation -- or for that matter, even the 17 BILLION previous valuation -- justified esp considering (according to the article) they are losing money ?

> The company’s bond offering documents showed fast-growing sales but even faster-increasing losses. WeWork had total revenue of $886 million but a net loss of $933 million in 2017, according to the documents.

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As someone else has pointed out, not owning the real estate is part of the reason for the high valuation.

A good franchise business will force the franchisee to buy the real estate and give the franchise the opportunity to buy the real estate at a fixed cost (either fixed outright or a multiple of revenue for the location), effectively giving them no downside on capital depreciation on the site (i.e. the value of the site going down) or the ongoing dilaps costs. They only have upside: they can buy the site if it's doing really well. And meanwhile, you're buying your training, goods, services, and paying a portion of your revenues to the franchise.

WeWork is like a franchise which has no interest in owning your real estate.

They and others have realised the opportunity to take advantage of a couple of factors in the macro (more fluidity in working working lives -- telecommuting, flexible work --, startups, low interest rates meaning units can be vacant and on balance sheet without too much pain for an owner) and build a smart offering around that: got an empty building OR bored of the overheads and headaches of managing an office space yourself? We'll lease it from you for a fixed price and then take any upside. You get smoothed cashflow and a fixed yield, and we get whatever upside we can make.

They don't have any of the overheads, complexity, costs, or risks of owning the real estate. The IP and brand they're building (brand is an important factor here!) are not wedded to geography. Shoreditch isn't cool for startups any more? WeWork is gone.

But they also don't have franchise fees, or a captive market of franchisees to sell goods and training too. WeWork ARE the franchisees in this comparison.

Owning the real estate is exactly why McDonald's is valuable :) but there are odd terms.

But it doesn't answer the existential question as to their valuation.

I don't see how WW has any systematic advantages at all.

Nobody really cares if offices are in WW or some copycat clone.

Many companies are wearing of paying heavy premiums for such offices and want out as soon as they can.

Real estate is an old business. There is no 'new' here. Dressing up places, making them cool and selling at a premium is not new.

I just don't see where the magic sauce in this business is.

I wonder too, but I do see some possibilities:

1) The brand has value. Sure, making an empty space into a co-working space is not that hard. However, how do you market that? How do you get potential workers to know about your space, and choose to work there? If WeWork or Impact Hub are the known brands, people will search there first, and never find you.

2) They may also be exploiting information asymmetry between the high-cost and low-cost areas. If a company in NYC or SF is used to paying $50/sqft/mo ($500/mo for just 10sqft) for space alone plus utilities, etc., they may not really balk at $500/mo for the co-working space used by a remote employee. Sure, those companies know they're getting fleeced compared to regular costs in those cities, but they may also not care, as it's not worth it to economize for just a few employees, and when it gets to many, they just negotiate a bulk deal with WeWork.

I think the brand surely has value, but not $30Billion worth of value. It's like a clothing line brand or something, i.e. you might trust it more, might be willing to open offices remotely there just because your familiar with it.

There is no 'asymmetry' in commercial real-estate really ... prices are well known and watched in every town. Do a little running around in any town and you get a pretty good idea very quickly.

Also, they are loosing a huge ball of money.

The BI article hints at 'dot-com bubble trouble' and I believe it for this one ... the economics look bad and it could crash.

If this goes, and say, Tesla pops ... it could be really bad because the 'crypto coin' thing is essentially a bubble of sort (by that I mean fuelled by speculation) and that could come crashing down very easily and quickly as well. There is also an AI bubble (AI is here to stay, but companies/valuations are whack) that needs a correction.

So long as the US economy stays good ... maybe all of this will hold, but some douche-bags are going to just make 'one lie too far' and things will get gummed up for a lot of otherwise good companies.

Add uber to that list.

Uber may be overvalued but they are viable on some level - so they won't go out of business, just investors will get hit.

Tesla needs cash, and if they can't get it, they could fail. Or be massively downsized.

WW needs cash badly, if they don't raise ... it will crash.

WW needs cash badly, if they don't raise ... it will crash.

I don't know about that. The relationship between WeWork and the building owners may be co-dependent rather than merely symbiotic.

If you owe $10,000,000 in rent, you have a problem. If you owe $10,000,000,000 in rent, the landlord has a problem.

Not sure to what extent this holds when you owe $10M each to 1000 different landlords, though (I have no idea how many different landlords they are dealing with).

i think the magic sauce is to create synergy in each WeWork econo-vortex for new economy micro-proprietors who are uniquely positioned to profit from aggregated networking opportunities and beer

Even though your post is brilliantly sarcastic ... it may work.

Starbuck's convinced a generation that they = coffee + environment.

WeWork could feasibly convince a generation of Gen-Z startup wannabes that 'they are startups'.

I find the milktoast 'fake startup' environments at WW kind of repulsive in that way - they are literally designed to be the 'environment for the post-Uni lifestyle' but in a watered down, 'safe space' inauthentic manner.

Kids are going through schools with 'everything', Unis 'with everything' (i.e. cappuccinos and lattes into class) to workspaces 'with everything'. It's like they don't have to encounter reality now until 30. And with 'retirement spaces' moving back from 65 ... we may successfully create the capitalist driven 'cradle to grave' lifestyle factories.

Like 'touring the world' is hoping from each of the 'French' and 'UK' and 'Canada' pavillions at Disney's Epcot centre ... you'll soon be able to walk through someone else's version of reality, like living full time in a 'real life commercial'.

I always appreciate the entrepreneurs who want to 'get out of there as soon as possible' for so many reasons.

All startups should have at least a few symbolic 'desks made out of doors' or something of the sorts, or maybe not-so-symbolic ones.

You seem very angry and judgmental about people's choices about what to consume and it's not even very clear what exactly you are angry about. The only thing that you reference explicitly is lattes.

Starbuck's convinced a generation that they = coffee + environment.

I'm not entirely sure what that equation means. That Starbucks has convinced a generation they're...a coffee shop? Even if you don't like their coffee, they are a coffee shop. That Starbucks...cares about the environment? By big corporation standards, you could do worse, I guess? Or do you mean that they present themselves as a good environment to do the "hang out here for a while or work here with a laptop" thing? With provisos about how wildly this can vary from location to location (boy howdy, can it), in general I'd argue they are a good place for that. In the SF Bay Area I have a panoply of cafes that serve better coffee, but the majority of them are louder and/or more crowded and/or more expensive and/or less comfortable and/or subtly-to-openly hostile to "digital nomads."

If I have a complaint against WeWork & friends, it's mostly a matter of cost; if I'd been bold enough to try a startup 10–15 years ago, which I probably should have, I wouldn't have dreamed of looking for office space until we had actual revenue (i.e., not VC/seed funding).

Starbucks is not really a 'coffee shop'. They are an 'experience' - moreover, and have re-defined what 'coffee' is to a generation. The reason it's problematic is because it's fundamentally inauthentic experience, and they don't create the experience that they are actually set out to achieve. Possibly their first handful of shops in Seattle were, but since then, it's been commoditized.

What they ostensibly want to crate is a 'mini community centre' a place where people can go, hang out, read, and interact in a hyper-local manner with 'people they know' - like the terraces in France or Italy. But what they've done is not this at all - the experience is utterly corporatized to the point of being banal. None of their products are locally sourced or relevant. They certainly didn't even try with things like Croissants (Starbucks croissants are like rubber, but who cares, so long as people don't know what a Croissant actually tastes like and keep buying them). The music is even 'lowest common denominator'.

There's a coffee shop near from me which is in fact the 'real deal': all foods made fresh each morning on-site, local owner who is actively engaged in the community (and a total character), and it's actually a true centre for finding out all the cool goings on in my hood. The music is chosen by the folks working there and it's always charming, nuanced and interesting. Literally with old French guys arguing about some political this or that (it's Quebec).

After hanging out in this local spot - visiting a Starbucks for me has about the charming authenticity of a McDonald's.

I've realized only recently that I think people have difficulty grasping this because they've lived in a corporatized bubble of culture their entire lives (this is common in North America) and have almost no context with which to compare it.

WeWork has pragmatic value (just like I don't mind grabbing a Starbucks when I'm out and about), but it's also designed to create an environment which is the 'romanticized' version of startups, not necessarily real ones. There is a great P Graham article about startups who 'play house' (I'm sorry I tried to find it for you to no avail) i.e. going through the motions. whenever I visit WW I get that feeling 10x. I also feel that the environments are inauthentic ... tiny little beer cups? What's with that? Liability? "Drink beer, but really, don't". Please.

A pragmatic concern is the 'arms race' that they kind of create for new startups trying to attract talent, in some ways 'hyper cool office' is becoming normative, and it's just an added, not-so-necessary expense.

I like the shared spaces for MeetUps however - this is actually quite valid and authentic.

There is somewhat of a network effect for business travelers. If you are WeWork member, I assume you can grab a desk in any of their buildings around the world. That is much better than needing to sign up for multiple co-working services, and it beats always working out of a hotel business center.

I am not saying WeWork can justify their valuation, but they (and some others) are fundamentally changing portions of the real estate market. They are putting more people per square foot into offices and are getting people to pay a premium for perks and flexible leases. Getting people to pay more for less space is a big deal (if it continues to work...) This is a totally different model than what traditional real estate players have done. Hence why a lot of commercial real estate players are scared and trying to catch up.

> I assume you can grab a desk in any of their buildings around the world.

No. At least for now.

> They don't have any of the overheads, complexity, costs, or risks of owning the real estate.

They spend massive sums of money to build out other people's buildings and typically enter triple net leases which means they do indeed have the overhead, complexity and costs of owning real estate. Even more complex really because they have a long term lease and need to constantly keep it filled with short term tenants.

I personally don't understand the valuation, but there certainly seems to be demand for both their bonds and equity. Here's another Bloomberg article with info on their recent $700mm bond sale in April and a couple of interesting excerpts:

> The company had initially planned to sell $500 million, and then received orders of about five times that amount.

> Moody’s Investors Service rated the notes Caa1, seven steps into junk. S&P Global Ratings rated them three steps higher than Moody’s at B+, while Fitch gave them a rating of BB-, four steps higher than Moody’s.

https://www.bloomberg.com/news/articles/2018-04-25/wework-bo...

It's because they were dangling nearly 8% yields out there. As a comparison Argentina was recently successful with a 100 year bond (!) at about the same rate. This is the same Argentina that has defaulted on its bonds eight times and as recently as 2014.

tl;dr disregard their ability to sell junk bonds

Not giving them props on their bond sale at all - I mean more that they had a huge level of interest in the sale so the market is showing a high level of interest DESPITE the junk rating. Bonds are junk when the reliability of repayment is low. I guess those investors (and anyone interested in the raise at $35b valuation) are ok with the risk.

The huge level of interest was because the huge yield, you'd have to work hard to issue debt at a higher rate. The fact they needed to offer such a yield is proof that a lot of people think they are going to fail. (Remember that the bond holders will typically be repaid before the VCs.)

Anything with a decent yield is oversubscribed in the new issue market right now. That said, these bonds were trading at 92.75 at the lows just days after being issued. New issue bonds don't trade down that low unless there's something seriously wrong with the name or if the entire market is puking.

And likely to default again in the next 12 months

I know your not trying to troll, statements of disbelief are very common about companies that are about to own an entire market with no real competition in sight. No one sees it yet but these guys are about to own office space and how that is acquired in the future, whose going to stop them? They are creating a future you don’t yet see.

People couldn’t believe Uber was worth more than Delta airlines in one of their valuation rounds.. this is very common. They were about to own the taxi industry and take a cut out of every ride.

This is so much bigger than that.

This is an interesting comparison, because Uber is also hemorhaging money and to a lot of people it's still not clear they're worth anywhere near as much as their valuation.

It's easy (relatively speaking) to build a big business when you can take on billions of dollars in losses. Turning that around is the hard part.

Plausible $15+ billion in sales over the next four quarters, growing at 70%, with the burn rate rapidly declining, and six years of accessible capital to operate with assuming zero further decline in their burn rate.

Uber will be near or at break-even within 18-24 months. Their sales will be over $20 billion at that point.

Are they worth three time sales? Definitely. How about 5x or more the $20 billion in sales two years out? Probably. Twitter is fetching 13x sales currently, and has only finally started making money after more than a decade of vast losses (even worse, Twitter has almost no growth).

So how does a Twitter-like 10x sales multiple on $20 billion sound, two years out? $200 billion valuation. Does that sound crazy? I think it's very rich, the capital markets may think it makes sense.

Netflix has a zillion PE ratio (and has for a long time), and a 16x sales multiple. Their margins are horrendous and will never be very good. There's a small chance they can ever grow into their current valuation (it'd require 500+ million global customers), much less anything higher.

Uber's quarterly sales will catch Netflix in probably four or five quarters. How about a 16x multiple on Uber's sales four years out, with a conservative $25 billion in sales at that point. How does $400 billion sound?

Their competition is literally every office building on the market...

Meanwhile, Uber and Lyft have been shut out of Europe and Asia, and at best might become the major (but not sole) player in the car service market.

>> Their competition is literally every office building on the market...

Definitely false. The majority of office buildings on the market aren't interested in leasing me spaces of varying sizes for terms from 1 month to 5 years.

Sure, but some are and coworking space competitors definitely are. I don't see the unique advantage, the moat if you will, to justify WeWork's valuation. I've seen comparisons to Uber in this thread but even if you presume for the argument that Uber's valuation is justified, the network effects don't seem nearly as strong for WeWork.

This. As an olderish tech person that was around during the dot com bubble and crash in the early '00's, I don't think this is going to end well.

Net loss, holy cow. $1.8B burn on $900M in revenue.

The general strategy must be undercut the market to buy market share, and then transform the market entirely.

I don't understand the precise mechanisms in the case of WeWork (it's not as clear as, say, Uber + self driving cars). Can someone explain?

They bought Meetup recently so maybe they are planning some sort of synergy?

I just received an email from them touting the ease with which I can rent space from them (free for some introductory period) for the meetup I run. The problem is that many (most, I'm guessing) meetups are funded by an individual. Unless their space is drastically less expensive than a lot of the alternatives I found when trying to find a space for my meetup, nobody is going to be able to afford to use their space.

It is "justified" because as long as you are a tech company with good name recognition Softbank is going to throw as much money at you as you ask.

Is softbank the new Yahoo? I remember back in the days when every startups revenue model was "eventually sell to Yahoo"

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